Chapter 3:

Class Comments

Ø Termination of Offer

ü An offer can “end” for a variety of reasons, including:

(1) Lapse

(2) Revocation

(3) Rejection

(4) Death or Incapacity of a Party

v Lapse

= Offer expires

ü An offer “lapses” (expires) when (1) the time stated in the offer expires or (2) if no time is stated, after a reasonable time.

Example/time stated in offer: “I will sell you my car today for $5,000.00.” If the offeree does not accept the offer today, the offer lapses.

§ Reasonable Time: An offer will expire in a reasonable time if no time is stated in the contract. A reasonable time will vary depending on the offer (e.g., if the offer is to sell fresh produce, the time period for acceptance will be much shorter than if the contract is for a non-perishable items such as a tractor).

v Revocation

An offer may be revoked before it is accepted or lapses. This is based on the theory that the offeror is the “master of his/her offer.” Revocation is effective when it is received by the offeree, either directly (“I revoke my offer) or indirectly (Joe promised to sell his car to Bailey but before she accepted, he sold it to another friend, who told Bailey about it).

Note: Example 3-1 (p.68) is an excellent example of the power of the offeror to revoke the offer.

Summary: Mary offers to sell her house to Ted and promised that the offer would remain open until Sunday. However, before Sunday, Mary sold her house to Seymour. Ted learns of the offer from another source. Mary could exercise her power to revoke her offer at any time before acceptance.

v Rejection:

An offer is revoked when it is rejected. It can be rejected directly (“I reject your offer”) or, more commonly with a counteroffer.

§ Counteroffer: Keith offers to sell his house to Margaret for $100,000. Margaret responds, “I’ll buy your house for $90,000.” By countering the offer, Margaret has rejected the offer and cannot revive it. Margaret’s offer of $90,000 now becomes the “offer” for the basis of a contract.

ü Rejection is effective upon receipt by the offeror.

v Death/Incapacity

An offer is rejected by the death of either the offeror or the offeree.

Example: Scott offers sell his car to Victor for $10,000. Before Victor accepts, Scott dies and the offer terminates.

Ø Option Contracts: Keeping an offer open

Option contracts keep an offer open until the time stated in the option contract. It allows the offeree the “option” to consider the offer without fear that the offeror will revoke the offer. It is a separate contract that buys the offeror’s power of revocation.

v Express Option Contract: “I promise to pay you $100 to keep your offer open until January 7, 2006.” Option contracts are often used when one party needs time to evaluate an offer (e.g., land developer must review designs for a particular piece of property to determine if it will accommodate his project).

Key: The option contract is buying (taking away) the offeror’s power to revoke.

v Implied Option Contract: Although the parties may not have an express option contract, it is common for parties to act in reliance on an offer. How this is treated will depend on whether the contract is unilateral or bilateral.

§ Unilateral Contracts: A unilateral contract is a promise for performance (e.g., “I’ll pay you $500 when you finish painting my barn”). If performance is begun, an implied option contract (that prevents the offeror from revoking his offer until performance is completed) exists because the offeree is acting in reliance on the offer.

Example (see Example 3-10 (p.75)): Farmer Jones has offered Simon $1,000 to paint his barn. After Simon has completed three sides, Farmer Jones revokes his offer. This would unjustly enrich Farmer Jones; therefore, the court would impose an implied option contract that prevents Farmer Jones from revoking his offer.

§ Bilateral Contract: A bilateral contract is a promise for a promise (e.g., “I’ll sell you my car for $500 if you will agree to buy it for $500”). Although a bilateral contract is generally accepted by a promise (e.g., “I’ll buy your car”), sometimes an offeree may act in reliance on the offer (e.g., I sell my car believing that you will sell your car to me); in such cases, the courts may impose an implied option contract. The key is to determine if the offeror could reasonably foresee that the offeree would be induced into accepting the offer by performance.