Formation — Contracts

At a tailgate party in Franklin, Dana yells over the noise that she would sell her rusted-out truck for a million dollars. A bystander shouts back, deal, and tells her they have a contract. Do they? No. No reasonable person hears a serious offer in that sentence, so nothing was ever on the table.

Now change one detail. Dana signs a written bill of sale for $4,000. She is bound, and it will not help her to say she was never really serious. That gap, between what you meant and what you showed, is the engine of this whole topic. Formation asks one threshold question. Did a binding agreement ever come into existence? By the end of this episode you will answer it for any fact pattern the exam hands you.

Here is the route. First the objective theory, the idea everything else hangs on. Then the offer, what makes one and what does not. Then acceptance, including the timing rule the exam loves. Then the ways an offer dies, and the four that cannot be killed. Then formation under the UCC, where the rules loosen and the forms do battle. And finally modification.

Start where the law starts. It cannot read minds, so it judges agreement by outward appearances. Under the objective theory, your words and conduct get the meaning a reasonable person in the other party's position would attach to them. Say something a reasonable listener takes as a serious offer and you have made one. Say something they would take as a joke, sarcasm, bluster, or anger, and you have not.

Which is why the tailgate shout is nothing and the signed bill of sale is everything. A secret reservation, I never really meant it, is irrelevant once the outward manifestation looked serious. Hold on to that. Offer, acceptance, and modification are all measured the same way.

So what is an offer? It hands the other side the power of acceptance, the ability to close the deal simply by agreeing. Restatement (Second) § 24 calls it a manifestation of willingness to make a bargain. It must be expressed so the other person is justified in believing their agreement is invited and will conclude the deal.

Three ingredients. One, present intent to be bound. A commitment, not an invitation to negotiate, not an opinion, not a price estimate. I will sell signals intent. I am asking $500 usually does not. Two, reasonably definite terms. At common law, the parties, the subject matter, and for a sale the quantity and price. For land, the description and the price. Three, communication to an identified offeree.

Now the rule that catches people out. An advertisement, a catalog, a price tag, a price quote. Normally none of these is an offer, only an invitation to make one. The reason is practical. If a store's coat ad were an offer, the store would be bound to everyone who read it, far past its stock. Rewards are different. A public promise to pay for a specific act is an offer anyone who performs can accept, but only if they knew of it when they performed.

Test it. A flyer reads, designer coats, unbeatable prices. Offer, or invitation? Invitation. Nothing about it is definite. Now a second flyer. First 3 customers Saturday at 8 a.m. get a designer coat for $10 each, first come, first served. That is an offer. Clear, definite, explicit, and nothing left to negotiate.

Contracts get classified by how the offeror invites acceptance, and the type tells you what the offeree must do. A bilateral contract wants a return promise, and a promise accepts it. A unilateral contract wants a completed act, and only finishing it accepts. $100 to whoever finds my dog is accepted by finding the dog, not by saying you will look.

An implied-in-fact contract is formed by conduct alone. Sit in the barber's chair and let the barber cut, and you have agreed to pay. No words at all, which is Dana's rule running the other direction. Do not confuse it with a quasi-contract, or implied-in-law. That is not a contract. It is a restitution remedy for unjust enrichment.

When it is unclear whether an offer wants a promise or an act, modern law lets the offeree do either, under Restatement (Second) § 32 and UCC § 2-206(1)(a).

Acceptance next. Only the offeree may accept, and that power is personal, not transferable. The offeree must know of the offer, so you cannot accept what you never knew existed. Unless the offer says otherwise, acceptance may be in any reasonable manner and medium. The offeror is master of the offer and may demand one method, but has to say so clearly.

Acceptance must be communicated, except in a unilateral contract, where finishing the act is the acceptance. And silence is generally not acceptance. You cannot write an offer saying, if I do not hear from you by Friday you have bought the goods. Silence counts only in narrow cases. Prior dealings, taking offered benefits knowing payment is expected, or the offeree's own words inviting it.

Now the timing rule the exam loves. An acceptance is effective the moment it is dispatched. Dropped in the box, handed to the carrier, sent. Not when it is received. So a contract can form before the offeror ever sees it, and a revocation mailed afterward arrives too late. The risk of a lost acceptance sits on the offeror.

Four limits. It applies only to acceptances. Rejections, revocations, and counteroffers are effective on receipt. It does not apply to option contracts, where acceptance is effective only when received and must arrive before the deadline. If a rejection goes out first and an acceptance second, whichever the offeror receives first controls. And the offeror can opt out by requiring receipt.

Walk it once. Ravi mails Sara an offer Monday. Sara mails her acceptance Wednesday, and it arrives Friday. The contract formed Wednesday, on dispatch. A revocation Ravi mailed Tuesday that reached Sara Thursday is simply too late.

At common law, an acceptance must mirror the offer exactly. Any change, addition, or omission turns the reply into a counteroffer, which rejects the original offer and flips the power of acceptance back to the offeror. So try two replies.

First, I accept, but only if you throw in the floor mats. Second, I accept, though I wish the price were lower. Which kills the offer? The first. It conditions assent on a change, so it is a counteroffer. The second is a grumbling acceptance. It complains, it does not condition, and a contract forms. A mere inquiry leaves the offer alive too.

An offer does not stay open forever. Six ways the power of acceptance dies. Lapse, at the stated deadline or after a reasonable time. Revocation, effective on receipt, any time before acceptance. Rejection. Counteroffer. Death or incapacity of either party before acceptance, automatically, even if the offeree has no idea. And destruction of the subject matter, or supervening illegality.

Revocation can also be learned indirectly. If a reliable source tells the offeree that the offeror already sold the item, the power to accept is gone. Put the events on a line and mark the moment each one bites.

The default is that an offeror may revoke any time before acceptance. That holds even after promising to keep the offer open, because a bare promise to hold it open has no consideration behind it. Four things change that.

One, an option contract. The offeree gives consideration for the promise to keep it open, and there is no revoking during the period. Note the trap. Acceptance under an option is effective on receipt, not dispatch. Two, a UCC firm offer, § 2-205. A merchant's signed written assurance to hold an offer open is irrevocable without consideration, for the time stated or a reasonable time, but never more than three months.

Three, part performance of a unilateral offer, Restatement (Second) § 45. Once the offeree begins performing, the offer is temporarily irrevocable and they get a reasonable time to finish. Four, detrimental reliance, § 87(2). The classic case is a subcontractor's bid a general contractor foreseeably relies on to win the prime contract.

Try the third one. Priya posts, $500 to anyone who paints my fence by Sunday. A painter starts painting. Can Priya revoke? No. Performance has begun, so the offer is locked for a reasonable time. Now the painter has only bought brushes. Can Priya revoke? Yes. Mere preparation is not performance. Contrast a bilateral offer, where beginning performance is itself the acceptance.

Now goods, and everything loosens. Article 2 is built to hold deals together when the paperwork is messy. Under § 2-204, a sale-of-goods contract can be made in any manner sufficient to show agreement, including conduct by both parties recognizing one exists. It can form even if you cannot pin down the exact moment, and it does not fail for indefiniteness with terms left open.

Section 2-206 handles acceptance. Any reasonable manner and medium unless the offer clearly says otherwise, and an order for prompt shipment is accepted either by promptly promising to ship or by promptly shipping. The sharp edge. Shipping non-conforming goods is both an acceptance and a breach, unless the seller seasonably says the shipment is only an accommodation.

Which brings us to the battle of the forms, § 2-207, the UCC's sharpest break from the mirror-image rule. Buyers and sellers fire pre-printed forms at each other, and the boilerplate never quite matches. At common law, either no contract formed or whoever sent the last form silently won.

Section 2-207 asks three questions. Step one, is there a contract? A definite and timely expression of acceptance forms one even with additional or different terms, unless it is expressly made conditional on the offeror assenting to them. Step two, what are the terms? Between merchants, additional terms come in automatically, unless the offer limited acceptance to its own terms, or they materially alter the deal, or the offeror objects in a reasonable time.

If either party is not a merchant, additional terms are only proposals that do not join unless expressly accepted. Step three. If the writings do not form a contract but the parties act as though one exists, conduct establishes it. The terms are then those both writings share, plus the Code's gap-fillers. Conflicting terms knock each other out.

The gap-fillers themselves. A reasonable price at delivery, § 2-305. The seller's place of business for delivery. A reasonable time for shipment. Payment when and where the buyer receives the goods. One term is different. Quantity, which courts will not supply, though output and requirements contracts still work because good faith measures it.

Last section. Modification, and the split is sharp. Common law follows the pre-existing duty rule. A modification needs new consideration, because promising to do what you already owe is not consideration. So the builder halfway through who demands more for the same work generally cannot enforce that promise.

The escape valve is Restatement (Second) § 89. A modification binds without new consideration if it is fair and equitable in light of circumstances the parties did not anticipate. An unforeseen rock formation forcing far more excavation. The UCC is simpler. Under § 2-209(1) a modification of a goods contract needs no consideration at all. The only test is good faith, so a demand for more must rest on a legitimate commercial reason, not extortion.

Two wrinkles. A no-oral-modification clause was traditionally ignored at common law, because parties can always orally agree to change their own deal. Under § 2-209(2) a signed one is enforced, though on a merchant's form a non-merchant must separately sign it. And a failed oral modification can still operate as a waiver, retractable by reasonable notice unless the other side materially relied.

A word on authorities, because this episode named no cases, and that was deliberate. NextGen questions give you a scenario and ask what the rule produces. They will not ask you for case names. What this topic does ask you to know by number is the UCC, and your source teaches it exactly that way.

If you keep only three things, keep these. § 2-207, the battle of the forms, because it decides most commercial fact patterns. § 2-205, the firm offer, capped at three months. And § 2-209(1), no consideration needed to modify a goods contract, good faith only.

Now the traps, straight from the examiners' favorites. One. Mixing the objective and subjective tests. A secret intent or a private joke never controls. Two. Applying the mirror-image rule to a sale of goods. For goods, § 2-207 governs, and a reply with extra terms can still be an acceptance. Three. Forgetting the mailbox rule's limits. Acceptances only, never rejections or revocations, and never options.

Four. Treating beginning performance the same in unilateral and bilateral offers. It accepts a bilateral offer. It only makes a unilateral offer temporarily irrevocable, and mere preparation is not enough for either. Five. Assuming a bare promise to hold an offer open binds. It does not, unless there is an option, a firm offer, part performance, or reliance.

Six. Requiring consideration for a UCC modification, when none is needed, or forgetting that the common law still requires it. Seven. Thinking silence is acceptance. Usually it is not. Eight. Assuming an advertisement is an offer. Usually it is only an invitation to deal. Notice how many of those turn on one fork. Goods, or not?

Time for the quick check. This one comes straight from the BARGO question bank.

A furniture maker, a merchant, sends a lumber yard, also a merchant, a purchase order for oak that says nothing about warranties. The lumber yard ships the oak with its own acknowledgment form, which accepts the order but adds a clause disclaiming the implied warranty of merchantability. Neither form makes acceptance conditional on the other side agreeing to its terms. The oak proves defective, and the buyer sues on the warranty.

Is the disclaimer part of the contract? Option one. Yes, because between merchants any additional term in a definite acceptance automatically joins. Option two. No, because the disclaimer appeared only in the seller's form and not in the purchase order. Option three. No, because between merchants a term that materially alters the deal does not become part of the contract. Pause here if you want a moment.

The answer is option three. The acknowledgment was a definite acceptance, so a contract formed even with the extra term. Between merchants additional terms do come in automatically, but not when they materially alter the deal, and disclaiming the implied warranty of merchantability is the classic material alteration. So the disclaimer drops out and the warranty stands. Option one states the rule and forgets its exception. Option two is right for the wrong reason, because additional terms often do come in from only one form.

If option one felt right, that is the half-learned version of § 2-207 the examiners are counting on. There are thirty-plus more questions on this topic alone.

Five things to take away. One. Assent is objective. What a reasonable person would take from your words and conduct, never your private intent. Two. An offer needs present intent to be bound, reasonably definite terms, and communication to an identified offeree. Advertisements usually are not offers. Three. Acceptance is effective on dispatch. Rejections, revocations, and counteroffers are effective on receipt, and options are always on receipt.

Four. An offer dies by lapse, revocation, rejection, counteroffer, death or incapacity, or destruction and illegality, unless it is one of the four irrevocable ones. Option, firm offer, part performance, reliance. Five. For goods, the mirror-image rule gives way to § 2-207, and a modification needs no consideration at all, only good faith.

Which brings us back to Dana. The shout across the tailgate bound nobody. The signed bill of sale bound her completely, and her private second thoughts never entered it. Formation is what you showed, not what you meant. Next time, Consideration and Substitutes.

Practice this topic with more than 2,900 exam-style questions, free to start, at nextgenbargo.com. This episode is for education and exam preparation only, not legal advice, and we are not affiliated with or endorsed by the NCBE or any bar examining authority.