978-1305575080 Chapter 12 Solution Manual

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Chapter 12

FORMATION OF CONTRACTS: OFFER AND ACCEPTANCE

RESTATEMENT

A contract requires an offer and acceptance. Both the offer and the acceptance must include language that

indicates the intent to contract rather than the intent to consider or negotiate a contract. Both the offer and

acceptance must include sufficient detail to evidence an agreement. Vague language is indicative of a lack of

intent. Minor details can be determined in the future, but the basic components of the agreement must be

present.

Once an offer is made, its continuing existence or eventual incorporation into a contract is determined by the

parties’ conduct and choice of language. An offeror can terminate an offer prior to acceptance through revocation

(with the exceptions of an option contract and UCC firm offers). An offeree can terminate an offer by making a

counteroffer of different terms or by simply rejecting the offer. An offer also is terminated by illegality or the death

or incapacity of the offeror.

Acceptance occurs through communication of appropriate language by a party authorized to accept (i.e., an

offeree). The method of acceptance controls the timing of the contract formation and certain methods of

acceptance carry some issues with respect to proof and timing of formation.

STUDENT LEARNING OUTCOMES

LO.1: Decide whether an offer contains definite and certain terms.

LO.2: Explain the exceptions the law makes to the requirement of definiteness.

LO.3: Explain all the ways an offer can be terminated.

LO.4: Explain what constitutes the acceptance of an offer.

LO.5: Explain the implications of failing to read a clickwrap agreement.

INSTRUCTOR’S INSIGHTS

Break the chapter down into three components – related Learning Outcomes are indicated in ( ):

1. What are the requirements for an offer?

Cover intent to contract (LO.1)

2. How is an offer terminated?

Explain revocation rights and requirements (LO.2)

Present the circumstances in which a counteroffer results

3. How is an offer accepted?

Provide an explanation for what constitutes acceptance (LO.4)

Explain the nature, effect and power of acceptance (LO.4)

CHAPTER OUTLINE

I. What are the Requirements for an Offer?

A. Contractual intention

1. Present intent to contract, not to open negotiations

CASE BRIEF: Wigod v. Wells Fargo Bank

673 F.3d 547 (7th Cir. 2012)

FACTS: Wigod brought an action against Wells Fargo Bank alleging, among other theories,

breach of common-law contract law. The U.S. Treasury implemented the federal Home

Affordable Mortgage Program to help homeowners avoid foreclosure in the nation’s housing

market in 2008. In 2009, the bank issued Wigod a four-month “trial” loan modification under a

Trial Period Plan (TPP). After the trial period, if the borrower complied with all of the terms of the

TPP Agreement, including making all required payments and providing all required

documentation, and if the borrower’s representations remained true and correct, Wells Fargo

had to offer a permanent mortgage modification. Wigod alleged that she complied with these

requirements and that Wells Fargo refused to grant a permanent modification. Wells Fargo

contended that the TPP contained no valid offer.

ISSUE: Did the TPP contain a valid offer?

REASONING: A person can prevent his submission from being treated as an offer by using suitable language

conditioning the formation of a contract on some further step. It is when the promisor conditions

a promise on his own future action or approval that there is no binding offer. Here, the TTP

spelled out two conditions precedent to Wells Fargo’s obligation to offer a permanent

modification. A reasonable person in Wigod’s position would read the TPP as a default offer that

she could accept so long as she satisfied the two conditions.

B. Definiteness

1. Discuss certainty vs. vagueness – e.g., an agreement to sell “a large amount of corn” is too vague to

be enforced

CASE BRIEF:Frank Novak & Sons, Inc. v. A-Team, LLC, dba ServiceMaster

6 N.E. 3rd 1242 (Ohio App. 2014)

FACTS: ServiceMaster as the general contractor hired to restore the Cleveland Brown Stadium

in time for the Browns’ first pre-season football game hired subcontractor Novak to perform

restoration and construction work. Novak sued for $37,158.82 for worked performed on the

August 2, 2007 severe rainstorm project, referred to as Loss 2. ServiceMaster contended that

Novak was bound by a written but unsigned subcontractor agreement, and that Novak’s alleged

oral contract was lacking any definite terms to be enforceable. From a judgment for Novak,

SeviceMaster appealed.

ISSUE: Was there sufficient evidence of definite terms to allow the court to enforce the oral contract?

REASONING: The record contained sufficient evidence of definite terms to enforce the oral contract. Novak

V.P. Pinchot credibly testified that Novak’s “time and materials” billing on the final invoice

contained the hours worked at the published union rate plus the cost of materials, plus 10

percent, which method of pricing is widely understood in the construction industry.

2. A document that is “too indefinite” may be made definite by reference to another writing

CASE BRIEF: In re Plankenhorn

228 B.R. 638 (N.D. Ohio 1998)

FACTS: Larry Browneller made an oral contract with Hubert Plankenhorn to restore a 1963 Chevrolet

Impala convertible. Larry told Hubert that he wanted a “damn good job”. Larry wanted a car

that would be competitive at the small amateur car shows he attended. When the finished car

had what Larry asserted were “waves” in the paint, he brought suit against Hubert for breach of

the oral contract.

ISSUE: Was there a contract with sufficiently definite terms?

REASONING: There was clearly a misunderstanding between the parties as to the quality of work which could

and would be obtained. Quality was a material term of the oral contract between the parties

upon which there was no shared understanding. Accordingly, a court will not find an individual

in breach of a term of the contract which term did not exist.

DISCUSSION POINTS: Have the students discuss definiteness/certainty of terms using the In Re Hubert

Plankenhorn case.

DISCUSSION POINTS: Thinking Things Through

The Rules of Negotiations

Have students discuss the law of contracts regarding the duty of good faith and fair dealing in the negotiation of

contracts. Remind them of each party’s need for due diligence regarding the facts and fairness of the

transaction. If a party to negotiations concludes that the other party’s final proposal is excessive or unfair, does

the party have the option of bringing a lawsuit for lack of good faith and fair dealing? Tie in to the discussion on

how the ethical standards for negotiations discussed in Chapter 2 are in the long term best interests of

businesses.

3. Implied terms – various details can be added later

4. Divisible contracts – courts can enforce those portions with sufficient detail

5. Unimportant vague details ignored – the remainder of the contract is enforceable

6. Exceptions to definiteness

a. Requirements and output contracts

b. Good faith, past history and industry custom place constraints on performance

CASE BRIEF: In re Delphi Corp.

394 B.R. 342 (S.D. N.Y. 2008)

FACTS: Delphi and Automodular entered into a series of purchase orders that obligated Delphi

to purchase, and Automodular to provide, all of Delphi’s requirements to be delivered to the

original equipment manufacturer (OEM) General Motors, as directed by G.M. G.M. informed

Automodular that G.M. now needs fewer parts, and also tells Automodular to make other

changes in certain services also covered in the contract.

Automodular requests a price increase per unit to adjust to the new terms. Delphi refuses.

ISSUE: Is Automodular entitled to a price increase under the existing requirements contract?

HOLDING: No.

REASONING: The parties have a requirements contract, meaning that the OEM’s needs dictate the quantity of

the specified goods during the life of the contract. This specific contract allows for changes to

quantity and other services covered in the contract without entitling Automodular to a price

adjustment.

DISCUSSION POINTS: Have the students discuss the exceptions to definiteness using the In re Delphi Corp.

case.

C. Communication of offer to offeree

1. The offeree cannot accept an offer not communicated

II. How is an Offer Terminated?

A. Revocation of offer by offeror

1. Revocation – it must be clear and definite

In your discussion of revocations of offers, address the topic of revocation of an offer to enter into a

unilateral contract. Usually what happens is that the offeree makes a partial performance, and

subsequently the offeror attempts a revocation. For example, a homeowner makes a unilateral

contract offer of $1,000 to a house painter to have the house painted by October 1. After the house

Emphasize that the offeror has the power to revoke an offer any time before acceptance, even

though the offeror promised not to do so or stated that the offer would be held open for a period of

2. Communication of revocation

a. Revocation is effective when sent

b. Revocation of the offer is effective when the offeree learns indirectly of facts that would indicate

3. Option contracts

a. A separate contract to hold the offer open

4. Firm offers

a. UCC § 2 -205

B. Counteroffer by offeree

1. Terminates the original offer

CASE BRIEF:Kemper v. Brown

754 S.E.2d 141 (Ga. App. 2014)

FACTS: While riding her motorcycle, Amy Kemper was struck by a vehicle driven by Brown. She

suffered serious injuries and Brown was charged with DUI. Kemper sent a demand letter to

Brown’s insurance claims’ administrator, Statewide, which stated in part:

Please send all the insurance money that Mr. Brown had under his insurance policy. In

exchange, I will agree to sign a limited release.

The release must not have any language saying that I will have to pay Mr. Brown or his

insurance company any of their incurred costs.

…. If you fail to meet my demand, I will be forced to hire an attorney and sue Mr. Brown

and your company. Please do not contact me, or my friends[,] as this demand is very

simple.

Statewide sent a letter to Kemper agreeing to settle her claims for the limits of Brown’s

liability insurance. Attached to the letter was a $25,000 check and a two-page limited liability

release form. The letter stated, in part:

“[i]n concluding the settlement, we are entrusting that you place money in an escrow

account in regards to any and all liens pending. This demand is being asserted to

protect the lien’s interest[.]”

Ms. Kemper rejected Statewide’s “counteroffer” and filed suit. Brown filed a motion to

enforce the “settlement agreement”.

ISSUE: Was there a legally enforceable settlement agreement in this case?

REASONING: To establish a contract the offer must be accepted unequivocally and without variance of any

sort. Statewide demanded that Kemper place the settlements funds into an escrow account to

protect against any pending liens. Its response was a counteroffer rather than an unconditional

and unequivocal acceptance. No binding settlement agreement was formed.

C. Rejection of offer by offeree

1. A rejection terminates the original offer

2. It is usually effective on receipt

Pose a hypothetical case for the class involving a vacillating offeree. For example:

A mails an offer to B, who mails a rejection back to A. Later in the day, B changes his or her

mind and mails an acceptance back to A then later mails a second rejection. Ultimately, B

So that the students fully understand the concept of rejection, have them solve the following

hypothetical case:

A makes an offer to B to sell a motorcycle for $300 cash, to be paid in one week, at the

time of delivery. B states, “I will consider your cash offer; in the meantime, I would like you

to consider a purchase price of $330, payable in three monthly installments, starting in one

D. Lapse of time

1. An offer terminates after a reasonable time if no time is stated

Challenge your students to resolve the following:

a. When an offer is made face to face, when will it usually terminate? Answer: At the end of the

conversation.

b. If a written offer concludes with “This offer is good for 30 days,” when do the 30 days start? Do

c. If a written offer concludes with “You have 30 days in which to accept this offer,” when do the 30

days start? Do they start from the date on the letter, date of mailing, date delivered, or date

d. Discuss the practical problem of an offer lapsing at the end of a “reasonable” period of time.

The problem here is how one determines reasonableness: What is reasonable to the offeror

A mails an offer to B. B receives the offer and mails an acceptance back to A the same day.

The acceptance is lost in the mail. Having not heard from B, and believing that a

reasonable period of time has passed, A sells the item to someone else. Subsequently, B

E. Death or disability of either party

1. If either occurs before acceptance, it usually terminates the offer

2. Emphasize that death or disability will not normally discharge the parties from their contractual

F. Subsequent illegality – after the offer is made, subsequent illegality terminates the offer

III. How is an Offer Accepted? (See Figure 12-1 in text)

A. Privilege of offeree to refuse to accept

1. Places of public accommodation and public utilities – restaurants refuse to serve

2. Antidiscrimination

3. Consumer protection – false advertising as in bait and switch

An interesting approach is to ask the students what effect, if any, a sign stating “We reserve the right

B. Effect of acceptance

1. A contract is formed

C. Nature of the acceptance

1. Acceptance is absolute and unconditional; otherwise, it constitutes a rejection and a counteroffer

3. Adding of terms to an acceptance can constitute a rejection. Point out the three areas mentioned at

a. Clerical details

D. Who may accept

An offer made to the general public may be accepted by any member of the general public who has

knowledge of the offer. If A makes to the general public an offer of a reward for the return of a lost article

and B returns the lost article without knowledge of the reward, must A pay the reward to B? Answer:

CASE BRIEF: Keryakos Textiles, Inc. v. CRA Development, Inc.

563 N.Y.S.2d 308 (App. Div. 1990)

FACTS: As a lease was about to expire, the landlord wrote the tenant stating the terms on which the

lease would be renewed. The tenant mailed a reply letter changing these renewal terms. The

tenant’s terms were rejected. The tenant then accepted the terms of the landlord’s original

letter. An action was brought to determine whether there was a lease contract.

ISSUE: Was there a contract or a rejection?

REASONING: The lease contract is governed by ordinary contract law. When the tenant offered other terms in

place of those made by the landlord’s offer, the tenant made a counteroffer. This had the effect

of rejecting or terminating the landlord’s offer. The tenant could not then accept the rejected

offer after the tenant’s counteroffer was rejected. Therefore, there was no contract.

DISCUSSION POINTS: Have the students discuss the impact of a counteroffer using the Keryakos Textiles, Inc.

v. CRA Development, Inc. case.

E. Manner and time of acceptance

1. The manner is specified by the offeror, and the offeree must follow

3. Unordered goods and tickets

The Postal Reorganization Act of 1970, Section 3009, provides that when a person receives

unordered mail merchandise from a commercial (noncharitable) sender, he or she has the right “to

F. Communication of acceptance

You may wish to cover UCC acceptance at this point (see Chapter 26)

1. Unilateral contract

a. Communication to the offeror is ordinarily not necessary

2. Bilateral contract – acceptance must be communicated to the offeror

DISCUSSION POINTS: E-Commerce & Cyberlaw

Contract Formation on the Internet

Discuss with students the nature of acceptance via point and click. What issues of information and security exist

in validating a click purchase?

G. Mailbox rule

1. Proper acceptance method

2. Acceptance is effective when sent

CASE BRIEF: Morrison v. Thoelke

155 So.2d 889 (Fla. App. 1963)

FACTS: The Thoelkes owned land. The Morrisons mailed an offer to the Thoelkes to buy their land.

The Thoelkes agreed to this offer and mailed back a contract signed by them. While this letter

was in transit, the Thoelkes notified the Morrisons that their acceptance was revoked.

ISSUE: Were the Thoelkes bound by a contract?

REASONING: The acceptance was effective when mailed, and the subsequent revocation of the acceptance

had no effect.

3. Applicable means of acceptance

a. Modern rule is any reasonable means of acceptance

4. Proof of acceptance by mail – testimony under oath, witnesses, and postal receipts are all

considered proof

H. Acceptance by telephone

1. Is acceptable unless required to be in writing

I. Acceptance by e-mail or fax

1. Courts will accept these as some proof of formation

J. Auction sales

1. Fall of auctioneer’s hammer is acceptance

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Newspaper ads – invitation to negotiate. While newspaper ads generally are considered invitations to

negotiate, this ad was specifically constructed to invite an offeree to take specific action, be among the first

three customers in line in order to qualify to purchase the coat. One reason why newspaper ads are

2. Acceptance; intent to contract. The parties clearly intended to contract and a contract can be evidenced by

papers grouped together; it need not all be on one form. “ACCEPTANCE ON REVERSE SIDE” does not

3. Communication of revocation. No. A revocation is not effective until it is communicated to the offeree. In the

4. Counteroffer by offeree. Judgment for Baker. When Nelson made changes to Baker’s offer, his action had

the effect of rejecting the offer and proposing a counteroffer to Baker, even though Nelson purported to be

accepting the original offer. Baker was not willing to buy under the terms stated by Nelson. This decision

5. Auction sale with reserve. Gordon was not correct. The auctioneer must sell to the highest bidder only when

6. Invitation to negotiate. No. Apart from the question of whether there had been a mistake or the question of

the effect of a mistake, the newspaper ad was merely an invitation to the public to make offers. It was not an

7. Contractual intent. Judgment for Hauser. The statements of the representative of the college made it clear

The case involves the ethical values of promise keeping, truthfulness, and fairness. Questions for student

discussion might include the following: Was the pledge solicitor being truthful in representing the pledge as a

8. Mailbox rule. The resignation became binding when the acceptance of the resignation was mailed. The fact

9. Existence of contractual intent. There was a binding contract. Because it appeared to a reasonable person,

there was a serious transaction in which the parties made an agreement with contractual intent. The long

10. Unconscionability; formation. The court held that there was no obligation to renew the lease and the absence

Where lessee had leased service station from lessor under series of three-year leases, with changes only in

rental terms, but there was no lease provision which entitled lessee to such periodic renewal, following

Although periodic renewals of a lease may give rise to expectations by the tenant that renewal is likely in the

11. Necessity of clear intention to accept. No. There was no acceptance of Cogdill’s offer because there was no

clear statement that the offer was being accepted. There was no acceptance when the offeree stated that I

12. Definiteness; agreement to make a contract at a future date. Sharp is incorrect in its assertion that no price

was mutually agreed upon. A base price of $144,200 had been agreed upon in the TSA. The parties were

13. Price quotes as offers [§ 12]; nature of acceptance [§13]. The price quotation e-mail lacked essential payment

and delivery terms and could not have induced the bidder to reasonably believe that its acceptance could

14. Rejection, counteroffer, revocation. The purchase and sale agreements signed by Joanne McLaughlin were

offers, even though they were drafted by the seller’s real estate agent. Heikkila’s alteration of the purchase

This case is an example of the “mirror image rule” in analyzing acceptance as offers. Under this rule, an

acceptance must be coextensive with the offer and may not introduce additional terms or conditions. Only a

LAWFLIX

Funny Farm (1988) (PG)

Near the end of this Chevy Chase movie, two couples face a formation issue as one couple attempts to purchase

a home. An offer, presented around a friendly kitchen table setting, is declined by the sellers. Have the students

Ten Things I Hate About You (1999) (PG-13)

Show scene in which Joey and Patrick Verona negotiate the terms for his date with Katerina. There is give and

management system for classroom use.