Suggested Additional Assignments
Bob and Katrina: Let’s Make a Deal
The chapter opens with a page of dialogue. Bob, a movie director, and Katrina, an actress, believe they
have formed a contract—but what are its terms? Divide students into two groups and have one group
write a brief contract capturing the deal from Bob’s perspective, and the other write a brief contract
capturing the deal from Katrina’s perspective. In class, select two representatives from each group to act
as lawyers for Bob and Katrina, respectively. Tell them they are meeting to hammer out the terms of a
deal based on what their clients told them and must try to agree on what those terms are.
Drafting: A Letter of Intent
Businesspeople use letters of intent frequently, although lawyers often urge otherwise. Have students draft
a letter of intent that arguably does—and arguably does not—create a binding deal for some transaction
within the students’ experience such as renting an apartment, buying a car, or booking a charter flight for
spring break. The students should be able to explain the nature of the ambiguity and how to remedy it.
Chapter Overview
Chapter Theme
A valid offer creates a power in the offeree to create a contract by agreeing to its terms. The law
determines whether a person intended to make an offer by looking objectively at all of the facts and
circumstances in which it is made. The law of offer and acceptance is premised on the common law
concept of “meeting of the minds,” in which an offeree understands and accepts an offer on the same
terms as the offeror. Vagueness or ambiguity in an offer or acceptance guarantees problems and may lead
to litigation. The executive or consumer, who articulates to herself precisely what she wants, and then
bargains clearly for it, is likely to spend more time doing business and less time in court.
Meeting of the Minds
Agreements that have a problem in any of the key areas do not amount to valid contracts.
Parties can form a contract only if they have a meeting of the minds. For this to happen one side must
make an offer and the other must make an acceptance.
offer
An offer is an act or statement that proposes definite terms and permits the other party to create a contract
by accepting those terms. The offeror is the person who makes the offer. The offeree is the person to
whom the offer is made.
Statements That Usually Do Not Amount to offers
An invitation to bargain is not an offer. A price quote is generally not an offer.
One thing invitations to bargain and price quotes have in common is that if they were offers, then the
offeror would almost invariably be unable to perform if everyone who received the invitation or price
quote could form a contract by accepting its terms.
Suppose a homeowner sends a letter to friends and neighbors expressing interest in selling his home, an
asking price of $200,000, and a closing on a date three months hence. If two recipients respond by saying
“I accept” can the homeowner perform both agreements? Obviously not, he only has one house to sell. Is
he, therefore, in breach of one of the agreements? Which one? If invitations to bargain and price quotes
are understood in this fashion then there should be no problem in recognizing why they are not offers.
Placing an item up for auction is not an offer. It is merely a request for an offer. The bids are the offers.
Most auctions are with reserve, meaning that the items for sale have a minimum price. The law assumes
that an auction is with reserve unless the auctioneer clearly states otherwise. The rules are different in an
auction without reserve. Here, there is no minimum. Once the first bid is received, the auctioneer must
sell the merchandise to the highest bidder.
Letters of Intent
Letters of Intent (LOI) pose a different problem. A LOI is between two parties and does not raise the
problem of multiple acceptances discussed above. The concern is that if negotiations break down one
party will treat the LOI as a binding agreement and seek its enforcement.
Business people often want letters of intent near the start of negotiations because they serve valuable
business purposes. Letters of intent can indicate areas of agreement and expose open terms, provide
comfort that the distance between the parties’ positions is small enough to warrant the time and expense
of continued negotiations, interest investors to consider providing financing, and serve as the template for
a definitive contract, if and when the parties reach agreement. Lawyers protect clients from the other
side’s undue reliance on the LOI as a binding agreement by peppering it with language disclaiming its
creation of legal obligations and expressing its temporary nature—what is often called “weasel language,”
because its purpose is to leave one’s client with a way out of the deal.
Advertisements
An advertisement is generally not an offer, but merely a request for offers. The consumer makes the offer,
and the seller is free to reject the offer. But, if a company proposes to take an action—like pay $100 to
customers who take certain, specific actions—then the ad may count as an offer.
Advertisers should be careful, since very specific ads do count as offers.
Landmark Case: Carlill v Carbolic Smoke Ball Company 1
Facts: In the early 1890s, English citizens greatly feared the Russian Flu. The Carbolic Smoke Ball
Company ran a newspaper ad that contained two key passages:
“£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the
influenza after having used the ball three times daily for two weeks according to the printed
directions supplied with each ball.”
“£1000 is deposited with the Alliance Bank, showing our sincerity in the matter.”
The product was a ball that contained carbolic acid. Users would inhale vapors from the ball through a
long tube.
Carlill purchased a smoke ball and used as directed for two months. She then caught the flu. She sued,
arguing that, because her response to the ad had created a contract with the company, she was entitled to
£100.
The trial court agreed, awarding Carlill the money. The company appealed.
Issues: Did the advertisement amount to an offer? If so, was the offer accepted?
Decision: Yes. The advertisement was an offer that only required performance to become a binding
contract.
1 1 QB 256 Court of Appeal, 1892.
Reasoning: The Carbolic Smoke Ball Company made an express and unmistakable promise to pay £100
under certain circumstances. It is possible that many people who use the Carbolic Smoke Ball will get the
flu. Too bad for the company; it must pay them all. Did the company intend to make this statement a
promise? It sure sounded like a promise. The company mentioned its bank deposit of £1000 as proof of its
sincerity and intention to comply.
Was this promise a binding offer? Generally, acceptance should be communicated to the offeror.
But some offers, like this one, do not require notice of acceptance.
It was obvious by the company’s words and the nature of the transaction that it did not expect
notice of acceptance, just performance. Carlill’s use of the smoke ball was her acceptance. Because she
got the flu despite her efforts, the company must pay her.
NOTE: Carlill lived 50 years more, dying, at the age of 96 — of the flu.
Question: Why was this advertisement interpreted as an offer, when advertisements are generally not
offers?
Answer: The advertisement was very specific in terms of what was being offered and what was
Question: What would happen if everyone who saw the ad accepted the offer? Would Carlill be
contractually bound?
Answer: Yes. This is generally the concern in interpreting advertisements as offers. It may not be
reasonable to conclude that a seller who has a limited number of items intends to be contractually
Additional Case: You Be the Judge: Cochran v. Norkunas2
Facts: Eileen Norkunas owned a home in Baltimore, Maryland. The Groves and the Cochrans expressed
an interest in buying the house. The two couples drafted a handwritten letter, stating:
Letter of Intent
We, Rebecca Cochran, Robert Cochran, Hope Grove and Robert Grove, Buyers-offer to buy 835
McHenry Street, Baltimore, Md. 21230 for $162,000. Payment by $5,000 check, this date and
$157,000 by certified or cashiers funds no later than April 17, 2004.
A standard form Maryland Realtors contract will be delivered to Seller within 48 hours. Seller to
pay only ½ normal transfer taxes and a 3% commission to Long & Foster. All other costs of closing to
be paid by buyers.
The contract will contain a financing requirement for buyers, but buyers will guarantee closing
and not invoke the financing contingency.
We will delete the standard home inspection contingency.
They buyers and their broker signed the letter. Norkunas accepted the buyers’ check for $5,000 but never
deposited it. A few days later, the agent sent Norkunas a package of documents including a “Residential
Contract for Sale.” Norkunas signed the contract but never returned it to the buyers. A week later,
Norkunas informed the buyers that she would not sell the property and took the property off the market.
2 398 Md.1, 919 A.2d 700, Court of Appeals of Maryland, 2007.
The buyers sued claiming the LOI entitled then to the house. The trial court gave summary
judgment for the buyers, but an intermediary appellate court reversed holding that the LOI was not
binding. The buyers appealed.
You Be the Judge: Did the LOI create a binding agreement?
Holding: No, judgment of the intermediary court affirmed. The court found that the LOI did not indicate
that the parties would be bound by it but was an agreement to make an agreement. Moreover, Norkunas
did not manifest an acceptance of any offer, especially since she did not return the documents sent to her.
According to the court a LOI is a preliminary agreement. Although some letters of intent are
signed with the belief that they are letters of commitment and, assuming this belief is shared by the
parties, the letter is a memorial of a contract. In other cases, the parties may not intend to be bound until a
further writing is completed.
Here, the buyers argue that the LOI is an enforceable contract because it was formed by offer and
acceptance, supported by consideration, contained all definite and material terms, and was signed by the
parties. Norkunas claims that the LOI was not an enforceable contract because it was not intended to be
the parties’ final expression of their agreement, the promised “Residential Contract for Sale” was to be
their final expression.
The court concluded that a reasonable person would have understood the LOI to mean that a
formal contract offer was to follow the LOI. The letter states that a “standard form Maryland Realtors
contract will be delivered to Seller within 48 hours.” Thus, the language in the LOI is indicative of intent
to memorialize the property sale through a final standard form contract. The clear language of the letter
demonstrates that the parties did not intend the letter to constitute a binding agreement for the purchase
and sale of Norkunas’ property.
Question: The parties agreed to an LOI with the purchase price, payment terms, and contingency
clauses. Why wasn’t that enough to create a binding agreement?
Answer: The LOI left also stated that a contract would follow in the future. The court found that
Question: Why did they go to the trouble of writing and signing a LOI if it had no legal effect?
Answer: The LOI captured the state of their negotiations, showing where the parties agreed. In
complex negotiations such as one for the purchase of real estate, it is critical to keep track of the
Question: You say the LOI is often important for business people. Do lawyers like to use them, too?
Answer: Lawyers use them for the same reasons, to narrow down the field of open issues and keep
Question: How do lawyers deal with those concerns?
Problems with De+niteness
It is not enough that the offeror indicates that she intends to enter into an agreement. The terms of
the offer must also be definite.
Case: Baer v Chase3
3 392 F.3d 609 Third Circuit Court of Appeals, 2004.
Facts: David Chase was a television writer-producer with many credits, including a detective series
called The Rockford Files. He became interested in a new program, set in New Jersey, about a “mob boss
in therapy,” a concept he eventually developed into The Sopranos. Robert Baer, a prosecutor in New
Jersey interested in writing for television, met Chase and pitched his own idea for a television series about
the New Jersey mafia. Baer didn’t know that Chase was pursuing a similar idea. Baer arranged meetings
for Chase with local detectives and prosecutors, who provided Chase with information about their
experiences with organized crime and showed him various New Jersey locations. Baer also met with Tony
Spirito, who gave Chase colorful background information about the local mafia. After returning to Los
Angeles, Chase wrote and sent Baer a draft for The Sopranos’ pilot, which Baer commented on. After The
Sopranos became a hit show, Baer sued Chase, alleging that on three separate occasions Chase had agreed
that if the program succeeded, Chase would “take care of” Baer, and would “remunerate Baer in a manner
commensurate to the true value of his services.” The District Court dismissed the case, holding that the
alleged promises were too vague to be enforced. Baer appealed.
Issue: Was Chase’s promise definite enough to be enforced?
Decision: No. The promise was too indefinite to be enforced. Affirmed.
Reasoning: To create a binding agreement, the offer and acceptance must be definite enough that a court
can tell what the parties were obligated to do. The parties need to agree on all the essential terms; if they
do not, there is no enforceable contract.
One of the essential terms is price. The agreement must either specify the compensation to be paid or
describe a method by which the parties can calculate it. The duration of the contract is also basic: How
long do the mutual obligations last?
There is no evidence that the parties agreed on how much Chase would pay Baer, or when, or for what
period. The parties never defined what they meant by the “true value” of Baer’s services, or how they
would determine it. The two never discussed the meaning of “success” as applied to The Sopranos. They
never agreed on how “profits” were to be calculated. The parties never discussed when the alleged
agreement would begin or end.
Baer argues that the courts should make an exception to the principle of definiteness when the agreement
concerns an “idea submission.” The problem with his contention is that there is not the slightest support
for it in the law. There is no precedent whatsoever for ignoring the definiteness requirement, in this type
of contract or any other.
Question: Chase said he would “take care of” Baer and pay him “in a manner commensurate with the
true value of his services.” Don’t those statements show Chase’s intent to compensate Baer?
Question: Then why does the court rule in favor of Chase and let him avoid payment?
Question: There are methods to determine what fair compensation would be. The trial court could
hear evidence about what others who’ve made similar creative contributions to television shows are
paid, or hear expert testimony from people in the business about the customary payment for services
similar to Baer’s. Why doesn’t the court try to arrive at a method of fair compensation?
Question: Why?
Answer: Because to separate enforceable promises from unenforceable promises, contract law
imposes certain formal rules about how a contract is formed. And one of those rules is that the parties
Question: How does the court arrive at its decision?
Question: Does that mean the parties must specify a dollar amount in the contract for its terms to be
definite?
Answer: Not necessarily, as long as the parties do specify a method by which compensation can be
Question: So Chase and Baer could have agreed, say, that Baer would be compensated in an amount
equal to the average paid for screenwriting services for the pilots of the three most popular HBO
television serials within the previous two years?
The UCC and Open Terms
Usually, Uniform Commercial Code (UCC) provisions are not significantly different from common law
rules. But on occasion, the UCC modifies the common law rule in some major way. We have just seen
that, under the common law, the terms of an offer must be definite. But under the UCC, many indefinite
contracts are allowed to stand.
Gap-Filler Provisions
Even if a UCC contract lacks a specific method for determining missing terms, the Code itself contains
gap-filler provisions, which are rules for supplying missing terms.
In general, if the parties do not settle on a price, the Code establishes that the goods will be sold
for a reasonable price. This will usually be the market value or a price established by a neutral
expert or agency. (UCC §2-305.)
An output contract obligates the seller to sell all of his output to the buyer, who agrees to accept
it. For example, a cotton grower might agree to sell its entire next crop to a textile firm. A
requirements contract obligates a buyer to obtain all of its needed goods from the seller. Output
and requirements contracts are by definition incomplete, since the exact quantity of the goods is
unspecified. The Code requires that in carrying out such contracts, both parties act in good faith.
Neither party may suddenly demand a quantity of goods (or offer a quantity of goods) that is
disproportionate to its past dealings or its reasonable estimates. (UCC §2-306.)
Termination of offers
Offers may be terminated by revocation, rejection, expiration, or by operation of law.
Termination by Revocation
An offeror’s revocation is effective when the offeree receives it. An offeree’s acceptance is effective when
it is out of the offeree’s control.
Case: Nadel v. Tom Cat Bakery4
Facts: A Tom Cat Bakery delivery van struck Elizabeth Nadel as she crossed a street. Having suffered
significant injuries, Nadel filed suit. Before the trial began, the attorney representing the bakery’s owner
offered a $100,000 settlement, which Nadel refused.
While the jury was deliberating, the bakery’s lawyer again offered Nadel the $100,000 settlement.
She decided to think about it during lunch. Later that day, the jury sent a note to the judge. The bakery
owner told her lawyer that if the note indicated the jury had reached a verdict that he should revoke the
settlement offer.
Back in the courtroom, the bakery’s lawyer said, “My understanding is that there’s a note…. I was
given an instruction that if the note is a verdict my client wants to take the verdict.”
4 2009 N.Y. Misc. LEXIS 5105 SUPREME COURT OF NEW YORK, NEW YORK COUNTY, 2009.
Nadel’s lawyer then said, “My client will take the settlement. My client will take the settlement.”
The trial court judge allowed the forewoman to read the verdict, which awarded Nadel – nothing. She
appealed, claiming that a $100,000 settlement had been reached.
Issue: Did Nadel’s lawyer accept the settlement offer in time?
Decision: No, the bakery owner’s lawyer revoked the offer before acceptance.
Reasoning: An offer definitely existed. And the twice-repeated statement, “My client will take the
settlement,” indicates a clear desire to accept the proposal. The problem is that the acceptance came too
late.
Analyzing the timeline, the bakery owner’s attorney indicated that if a verdict had been returned, he
revoked the offer. This notice was given before the attempted acceptance. And so, since a verdict had in
fact been returned, the offer was no longer open.
The parties did not reach a binding settlement agreement.
Question: Why was Nadel’s attempted acceptance not effective?
Answer: Nadel’s lawyer’s attempted acceptance came after the offer had been revoked. There was no
longer an open offer from the baker to accept.
Question: When exactly did the baker’s lawyer revoke the offer?
Answer: The bakery’s owner’s notice to Nadel’s lawyer indicated that if a verdict had been reached,
then the settlement was no longer on the table. Once the jury sent its verdict to the judge, the offer
was revoked.
Making Contracts Temporarily Irrevocable
Some offers cannot be revoked, at least for a time.
With an option contract, a party buys the right to have the offer held open. The offeror may not revoke
an offer during the option period.
A firm offer under the UCC is an offer that by its own terms will be held open for a given period. If a
merchant signs a promise made in writing, and if the promise agrees to hold open an offer for a stated
period, then the offer may not be revoked for stated period, up to three months.
Termination by Rejection
Rejection may be clearly stated. It immediately terminates the offer.
Countero#er
A counteroffer is a rejection and terminates the original offer. A party makes a counteroffer when it
responds to an offer with a new and different proposal.
Termination by Expiration
An offeror may set a time limit on an offer; if she does not, the offer expires after a “reasonable time.”
Termination by Operation of Law
An offer terminates if the offeror dies or becomes mentally incapacitated, or if the subject matter of the
offer is destroyed.