Legal Summary and Examples of Contract Offer and Acceptance
To form any contract, you need three things - an offer, an acceptance, and consideration. This hub is going to focus on offer and acceptance, often called "mutual assent" or "a meeting of the minds". I'll take up the ins and outs of consideration in another hub.
What is an offer? An offer creates the power of acceptance. An offer must: (1) make an expression of a promise, undertaking, or commitment; (2) have certainty and definiteness in its terms; and (3) be communicated to the offeree (person you are offering something to).
Let's look at each element.
1. What does it mean to make an expression of a promise? You don't have to say "I offer" or "I promise". Consider these two statements:
Statement 1: "I will sell you my gumball machine for $400"
Statement 2: "I am asking $400 for my gumball machine."
The first is an offer. The second is not. Why? The first is "an expression of commitment." You will sell your gumball machine for $400. The person you have communicated this to has "the power of acceptance." That person has the power to create a contract with you.
The second statement is considered an invitation to negotiate. You have not created a power of acceptance - you have only made an invitation for someone to make an offer. What you are saying is, "I am asking for someone to offer me $400 for my gumball machine." The person could respond, "I'll give you $400 for that gumball machine", which is an offer. and you could say, "On second thought, I believe I'll need $450." (which is technically a rejection and counteroffer) In Statement 1 above, which was an offer, if the person agrees to pay what you have asked, you have a contract. You can't go back and say, "I believe I'll take $450 instead of $400." If you do not tender the gumball machine for $400, you have breached the contract and are liable.
Another example of expression of a promise. Consider this statement:
Redneck Ricky is out on the lake in his newly financed $50,000 bass boat. Ricky forgot to add oil to the gas and now his motor isn't running. Hillbilly Hank trolls up in his bass boat to help Ricky out. Ricky is getting madder by the second about his boat not running.
Ricky exclaims, "If you get me off of this lake, you can have my boat for all I care!"
Offer? No. It's a statement made in anger and doesn't demonstrate an expression of a promise. The same is true for statements made while bragging or in jest. Therefore, the context of an offer must always be looked at. BUT - whether a statement is an offer is OBJECTIVE - meaning it's an offer if an ordinary person would consider it to be an offer. Consider Ricky's situation.
Suppose he said in a calm voice, "If you get me off of this lake, you can have my boat for $35,000."
Hank dutifully gets Ricky to shore and writes him a check for $35,000. Ricky says, "Whoa, nah, I was mad as a wet hen out there - I didn't mean that."
Is there a contract? Maybe. Hank thought he was being serious even though Ricky didn't. If it went to a trial, a jury would decide whether it "objectively" sounded like an offer - whether Ricky meant it to be or not.
The last point to note on the expression of a promise is advertisements. Advertisement which contain price quotes are usually considered invitations for offers. They are considered an announcement of prices at which sellers will receive offers. But note - If they describe a specific product and give a price - it could be definite enough to be considered an offer.
2. An offer must have definite and certain terms. Generally, you need to know the identity of the offeree, the subject matter of the offer, and the price to be paid.
The identification usually isn't a problem. Suppose a person posts a reward of $20 to the person who finds and returns Freckles the cat. Who is the offerree? The person who finds and returns Freckles the cat.
The subject matter of the deal is important. For real estate, you need a description of the land. For goods, you need quantity.
Price is only a required term in real estate contracts. Price seems like it would be the most essential term of any contract, but it's not. Courts will supply a reasonable price as long as enough terms are present to "fill in the gaps" of the missing terms. Suppose a store orders 50 widgets from a second store and the second store accepts. Price is never discussed. A court, if needed, can determine the price of the contract by determining the price of 50 widgets at the time of delivery.
3. An offer must be communicated. To have the power of acceptance, an offeree must know about the offer. Consider my example of the $20 reward for Freckles the missing cat. Suppose Ricky finds that cat and brings it to its owner, never knowing about the reward. Ricky passes by the first light pole from the owner's house after dropping Freckles off and sees the sign for the reward. Ricky has no right to the reward because he didn't find and return Freckles in anticipation of receiving $20 - he never knew about it.
Terminating an Offer
Now that we know what an offer looks like, how do we terminate an offer once it is made? We terminate an offer by revocation.
Generally, you can revoke an offer any time before it is accepted. By revoking your offer, you take away the offeree's power of acceptance.
One important exception is the option contract. An option works like this:
You offer to sell your prized blue-tick coon hound to your buddy T-Roe. T-Roe says, "I'd love to buy that coon hound but I can't until next month." You tell T-Roe, "I'll hold onto her for one month for another $50." T-Roe agrees.
You've given T-Roe the "option" to buy the hound for another month. That means you can't revoke the offer you've already made to T-Roe or sell to anyone else. If one month passes and T-Roe doesn't buy her, then you can revoke your offer and sell to someone else.
Let's look at that coon hound with different facts. You offer to sell to T-Roe and he says he can't buy for one month. You "promise" to hold onto the coon hound for one month for T-Roe. You can revoke the offer and sell to someone else at any time. You have not entered an option contract because there was no "consideration" for you keeping the hound for another month. In the first example, you kept her for $50. In this example, you received no benefit of doing so. (I know I said I wouldn't talk about consideration - sorry)
Bottom line is that you can't revoke an offer which is held open by a valid option contract until that option expires.
How about the offeree terminating the offer?
The offeree can terminate the offer by an express rejection, counteroffer, lapse of time, or by operation of law.
An express rejection is pretty self explanatory. If you say "No, I reject your offer." The offer is terminated.
A counteroffer terminates the original offer and operates as a new offer. Thus the original offeror becomes the offeree and has the power of acceptance. If you change or add one term of the offer, you have made a counteroffer. If you offer to sell me your dog for $100 and I say, "I accept, if you give me 1 penny back", you've made a counteroffer.
A lapse of time can terminate an offer. If the offer has a time period by which it must be accepted, it automatically terminates at the end of that time period (which begins to run when the offer is received). If there is no specified time of acceptance, it must be accepted in a "reasonable" time. 30 days from when the offer is received is a good rule of thumb as being a "reasonable time" to accept but can vary widely depending on the circumstances.
An offer can terminate by operation of law if one of the parties dies or becomes incapacitated or if the subject matter of the offer is destroyed. If my camper I offered you is destroyed by a grizzly bear, the offer to buy that camper is terminated.
An acceptance is a "manifestation of assent" to the terms of your offer. The person who you made the offer to must make the acceptance. An acceptance must normally be communicated to the offeror (an exception to this is when you apply for something like dental insurance - you fill out the application and instead of calling you and saying "we accept your offer to purchase dental insurance" the company will just issue you a policy and start hitting your bank account as an acceptance of your offer.)
An acceptance must "mirror" the terms of the offer. Known as the mirror image rule. If you add or change any term in your acceptance, it is considered a counteroffer. (the UCC has altered this with the sale of goods. If new terms are added to an acceptance, they may or may not become terms of the contract depending on whether or not both parties are merchants.)
Lastly, the mailbox rule states that an offer is accepted when it is placed in the mailbox. I know this doesn't come up so much right now with the computer fad and electric mail, but nevertheless, the mailbox rule still exists. The mailbox rule won't apply if the offer stipulates an acceptance is not effective until received or if the option contract is involved.
That's your basic overview of offer and acceptance. Take the quiz below and see how you do!