Chapter 2

Bargain Theory for Enforcing Promises and the Requirement of an Agreement

The principal ground for the enforcement of promises is called a “bargained-for exchange.” A bargained-for exchange, such as an agreement for the exchange of a piano for $400, is legally enforceable, whereas a simple promise to make a gift of the piano is not enforceable. In a bargained-for exchange, a promise is said to be “supported by consideration” because the promisor gets something in exchange for (or as the price of) his or her promise. Part A of this chapter covers the bargained-for-exchange theory for enforcing promises (also called “the bargain theory of consideration”).

A party seeking the enforcement of a bargained-for exchange must also show that the parties actually agreed to the exchange. Chapter 1 presents the example in which you casually mention to your neighbor, Alice, that you are thinking of selling your piano for $400 and Alice instantly announces that she accepts your offer and insists that you have a contract. It does not take much knowledge of contract law to believe that Alice is not entitled to the piano because you did not reach an agreement. But suppose you used language that Alice reasonably believed demonstrated your intent to contract, such as “I would like to sell,” even though you were still not sure that you actually wanted to sell. Does Alice’s acceptance of your “offer” form an enforceable agreement? Part B of this chapter illustrates how contract law sorts out mere talk and negotiations from the formation of enforceable agreements.

A. THE BARGAIN THEORY OF CONSIDERATION

1.Bargained-for Exchange Versus Gift Promise

As already mentioned, a bargained-for exchange is legally enforceable, whereas a simple gift promise is not enforceable.¹ In a bargained-for exchange, the promisor requires something from the promisee in return for the promise. We can think of what the promisor gets in return as the price of the promise. The price of the promise is called “consideration.” You promise to sell the piano to Alice, but only in exchange for Alice’s promise of $400. Contract law says your promise is “supported by consideration,” namely the promise of $400, and is therefore enforceable.² A simple gift promise of the piano is not supported by consideration and therefore unenforceable. If the donor of the gift actually delivered the gift, however, the donor cannot get it back.³

To make a promise enforceable, the promisor must “bargain for” or request the consideration supplied by the promisee in exchange for the promise.⁴ Suppose a “benevolent” person, Ron D. Jockefeller, promises to buy clothes for a homeless person if the homeless person walks to a clothing store a few blocks away. If the homeless person walks to the store, is Jockefeller’s promise of the clothes enforceable?⁵ Only if Jockefeller bargained for the homeless person to walk to the store, which in turn depends on whether Jockefeller’s motive was to extract the walk as the price of the promise of clothes. But in order to understand Jockefeller’s motive, we need more facts. Suppose Jockefeller owned a restaurant and the homeless person had camped out in front of the restaurant. These facts support a finding that Jockefeller’s motive for his promise was to remove the homeless person from the vicinity of the restaurant and we can therefore say that Jockefeller bargained for the homeless person’s walk to the clothing store. But if Jockefeller did not own a restaurant and made the promise, not because he would get something in return, but simply because he is a wonderful person, the promise would constitute a gift promise and would be unenforceable. The homeless person still must walk to the store to pick up the gift. But those in the know say that the trip to the store is a condition necessary to pick up a gift, not consideration to support Jockefeller’s promise.⁶

Of course, determining whether something is a condition necessary to receive a gift or consideration to support a promise is often no easy task. Consider Judge Benjamin Cardozo’s famous opinion in Allegheny College v. National Chautauqua County Bank of Jamestown.⁷ In a writing, Mary Yates Johnston promised Allegheny College $5000. The writing stated that the money “shall be known as the Mary Yates Johnston memorial fund.”⁸ Johnston contributed $1000 of the gift, with the rest to be paid after her death, but then she repudiated the promise. After Johnston’s death, the college sued her estate to enforce her promise. Judge Cardozo held that when the college accepted the $1000 it assumed the duty “to perpetuate the name of the founder of the memorial” and that was “sufficient in itself to give validity to the subscription within the rules that define consideration for a promise of that order.”⁹ An alternative interpretation strongly urged by the dissent was that “[t]he sum offered was termed a ‘gift’ by [Johnston]. Consequently, I can see no reason why we should strain ourselves to make it, not a gift, but a trade.”¹⁰ The correct interpretation of Johnston’s language naming the fund after her depends on Johnston’s motive—was she extracting a promise to use her name as the price of her promise of the money, or did she want to make a gift, with the hope or suggestion that the college would use her name. Obviously, reasonable minds can (and did) differ on this factual question.

A promisor’s gratitude for the promisee’s past good conduct or services does not constitute consideration because the promisor is not extracting and the promisee is not supplying anything as the price of the promisor’s promise. In the well-known case of Dougherty v. Salt,¹¹ for example, the promisor, Helena Dougherty, gave her eight-year-old nephew, Charley, a $3000 promissory note (a written promise to pay the money). This came about after Helena remarked to Charley’s guardian that she wanted to “take care” of Charley, and the guardian told Helena not to “take it out in talk.” Helena then gave Charley the note, which included the notation for “value received.” As she handed her nephew the note, Helena added: “[y]ou have always done for me, and I have signed this note for you. Now, do not lose it. Some day it will be valuable.”¹²

Of course, it is difficult to see what an eight-year-old could have “done” for his aunt, but even if he had performed services for her or otherwise benefitted her, Helena’s subsequent promise would not have been enforceable. Helena did not make her promise with the motive of extracting something from her nephew in return, and therefore the court held that her promise was an unenforceable gift promise.

2.The Promisor’s Motive

You can see that a lot turns on the promisor’s motive for making the promise. For your promise of a piano to be enforceable, your motive must be to obtain Alice’s promise of $400. For the promise of new clothes to be enforceable, the promisor’s motive must be to remove the homeless person from the premises. The focus on motive, however, is misleading without considering two caveats. First, although few courts address the issue clearly, contract law measures the promisor’s motive objectively, meaning that a reasonable person must believe that your motive for making the promise of the piano was to obtain a return promise of $400.¹³ A promisor’s actual motive is irrelevant. We will see in Part B of this chapter that this focus on apparent rather than actual motive is consistent with contract law’s focus on apparent rather than subjective meaning of the language of negotiation. (So when you ask for $400 for your piano, you cannot enforce your secret, inner intention to sell for $500.) But much more on this in Part B.

The second caveat on the issue of motive is that a promisor’s motive of obtaining something in return for the promise (as determined objectively) does not have to be the primary or even a substantial reason for making the promise, it simply has to be one of the reasons.¹⁴ This insight will help you understand this challenging bit of Restatement (Second) of Contracts jargon in Section 81: “The fact that what is bargained for does not of itself induce the making of a promise does not prevent it from being consideration for the promise.”¹⁵ “Of itself” is the key phrase here. What the promisor bargains to receive may be only one of many motives for making the promise, and even an insignificant motive.

Not only must a reasonable person believe that one of the promisor’s motives was to extract consideration from the promisee, but a reasonable person must believe that the promise actually induces the promisee to deliver that consideration.¹⁶ If it appears that the promisee had a completely different motive for promising or performing what seems to be consideration for a promise, the promise is unenforceable. Suppose for example, Uncle strongly desires Nephew to quit smoking and therefore promises Nephew $2000 if he quits. Nephew quits smoking and demands the $2000. Without more, you might conclude with some confidence that Uncle’s promise is enforceable. However, suppose Nephew had seen a doctor two months before Uncle’s promise and the doctor strongly advised Nephew to quit smoking. In light of this news, Nephew did quit, unbeknownst to Uncle. Uncle’s promise of the $2000 would be unenforceable because of the absence of consideration to support his promise. Uncle’s promise did not induce any action on the part of Nephew. (Nephew should not be too sad about losing the $2000. He will gain immeasurably by having quit smoking.)

3.What Must Be Extracted

To constitute consideration, the promisor must bargain for either a return promise or a performance.¹⁷ First, with respect to a return promise as consideration: In a purely “executory bilateral exchange” (meaning that both parties have made promises, but neither party has performed theirs yet) of a piano for $400, the seller extracts a promise from the buyer of $400 in exchange for the seller’s promise to sell the piano and the buyer extracts a promise from the seller to sell the piano in exchange for the buyer’s promise to pay $400. Each party’s consideration is a return promise (the seller’s promise of the piano and the buyer’s promise of the $400).

You can see that in an executory bilateral exchange each party is both a promisor and a promisee. (The seller is a promisor with respect to his promise to sell the piano and a promisee with respect to the buyer’s promise to pay $400. Conversely, the buyer is a promisor with respect to her promise to pay $400 and a promisee with respect to the seller’s promise to deliver the piano.) This seems to confuse some students because in most cases the court refers only to one of the parties as a promisor and one of the parties as a promisee. Usually only one of the parties has breached the contract and the other party has sued for damages. The court focuses on the broken promise and the party who made that promise, namely, the promisor.

Now, with respect to a performance as consideration, the seller could have promised to deliver the piano in exchange for the buyer actually paying (not promising to pay) the seller $400. If the buyer pays the money, the seller’s promise is enforceable because it is supported by consideration, namely the $400. The point is that consideration does not have to consist of a return promise. A promisor can extract a performance as consideration for the promise.¹⁸

The Restatement (Second) of Contracts sets forth the kinds of performances that constitute consideration. These include “acts” and “forbearances.”¹⁹ Actually paying the $400 for the piano is the kind of “act” the Restatement has in mind. Forbearances include desisting from exercising one’s legal rights, such as the right to smoke or drink when one is at the age of majority.²⁰ In other words, if your parents promise to pay for your law school education if you do not smoke or drink for those three heavenly years, contract law would enforce their promise. Your forbearance to exercise your right to smoke or drink is good consideration to support your parents promise.

Courts often state that the consideration extracted by the promisor from the promisee (either a performance or a promise) may be a benefit to the promisor or a detriment to the promisee.²¹ This language suggests that the promisor need not benefit from the consideration she receives. However, it is difficult to discern what a promisor’s motive for extracting the consideration would be if she does not benefit in some sense.

Hamer v. Sidway²² illustrates the fogginess of the benefit-detriment principle. In Hamer, Uncle promised Nephew $5000 if Nephew “would refrain from drinking, using tobacco, swearing, and playing cards or billiards for money until he should become twenty-one years of age.”²³ Nephew forbore to engage in those pleasures until the age of twenty-one, and sought the $5000 from Uncle’s estate. When the estate would not pay, Nephew sued. The issue was whether Nephew’s forbearance constituted consideration to support Uncle’s promise.

The court, citing an early treatise, stated that “ ‘[c]onsideration’ means not so much that one party is profiting as that the other abandons some legal right in the present, or limits his legal freedom of action in the future, as an inducement for the promise of the first.”²⁴ Based on this definition, the court held that Nephew’s forbearance constituted consideration regardless of whether it benefitted Uncle. Still, as a member of Nephew’s family, Uncle very well may have benefitted from Nephew’s forbearance, which Uncle apparently believed would do his nephew good. This benefit supports the determination that Uncle’s motive was to extract the forbearance. Some discussion in the case, however, appears to suggest that Uncle’s motive was irrelevant and that Nephew’s detriment was enough (“It is sufficient that [Nephew] restricted his lawful freedom of action * * * upon the faith of his uncle’s agreement”²⁵), leading two luminaries of contract law to criticize the Hamer opinion.²⁶

In fact, it is hard to think of a case where forbearance would be consideration (i.e., “bargained for”) if it did not benefit the promisor at least psychically. Of course, if psychic benefit to the promisor is enough to establish that a detriment is consideration, every gift promise could be enforceable. The promisor enjoys making the gift and the promisee forbears from asserting her right not to accept the gift. Contract law has not gone this far, probably mindful of Lon Fuller’s admonition that gift promises are not important enough to enforce legally.²⁷ Perhaps all that can be said is that benefit to the promisor is “[a]n aid, though not a conclusive test” of consideration,²⁸ and that courts rule out as consideration a benefit that is too ephemeral.

4.Forbearance to Sue as Consideration

Suppose Alice has wrongfully trespassed on your property and cut down some trees. (Neighbors can be a real pain, can’t they?) You approach Alice and complain, but get no satisfaction. You therefore mention that you “will have to go to court.” Alice now reconsiders and states that she promises to pay you $500 for the lumber if you do not sue her. You don’t sue. Is her promise enforceable?

Note that in this example Alice’s promise is supported by consideration, namely your forbearance to sue on a valid claim. Her promise is therefore enforceable.²⁹ But suppose you knew the trees Alice cut down were on Alice’s property, and you still threatened to sue, with the same response from Alice, namely a promise of $500. In this example, you and Alice agreed to an exchange—a promise of $500 in exchange for your forbearance to sue. Moreover, your forbearance to sue may be very beneficial to Alice. She doesn’t have to pay a lawyer or spend time in legal wrangling. But contract law will not enforce this exchange on grounds of public policy. We do not want people going around extorting promises in exchange for forbearing to sue on claims they know are invalid.³⁰

The two examples constitute the bookends of problems that can develop with respect to forbearance to sue. In the first example, your claim was valid—Alice trespassed and you were damaged. Alice’s promise to pay was enforceable because it was supported by consideration, namely your forbearance. In the second example, you are a nefarious extorter because you knew your claim was not valid. Alice’s promise therefore was not enforceable on public policy grounds. Extreme facts lead to easy decisions. Now the harder stuff.

Suppose you reasonably and honestly thought the trees were yours, but they were not. Perhaps you had never learned the precise location of the property line. (Reasonable people may not know the precise boundaries of their property. I don’t and I’m very reasonable.) Contract law calls your claim “colorable” or “doubtful” and treats your forbearance to sue as good consideration.³¹ After all, your motive was not to extort Alice and you were both honest and reasonable in your beliefs. In fact, according to the Restatement (Second) of Contracts, you only have to be reasonable or honest about your beliefs about the trees—you don’t need both.³² So, for example, if you are honest but unreasonable—the trees are in the middle of Alice’s property but you honestly (but unreasonably) believe they are yours—and Alice offers you $500 to avoid litigation, the Restatement treats your forbearance as consideration. Perhaps this approach is too favorable to negligent people—public policy should discourage negligence as well as extortion. In addition, it is hard to see why the Restatement enforces a promise of $500 for your forbearance to sue when you actually knew the trees were not yours even though a reasonable person might believe they were yours. Your dishonesty is exactly the kind of conduct the law should try to discourage.

5.The Policies Behind Enforcing Bargained-for Exchanges

The previous section introduces public policy into the analysis of promise enforceability. But we haven’t yet evaluated the policy choices made in distinguishing unenforceable gift promises from enforceable bargained-for exchanges.

Hopefully you are gaining a solid understanding of the rules of promise enforcement. Knowledge of the reasons behind the rules should help hone your comprehension. Nevertheless, as you read the following discussion you should understand that it mostly summarizes the work of Lon Fuller, a leading contract law scholar of the last century. As such, you should not take the discussion as gospel. Try to understand the strengths and weakness of the explanations. Most of all, evaluate whether you believe contract law should have drawn the line between enforceable bargained-for exchanges and unenforceable gift promises.

Probably the most famous article positing the reasons for the bargain theory of consideration, at least to contracts professors and their students, is Fuller’s Consideration and Form.³³ Boiled down to its essence (which cannot possibly do it justice), Fuller posited both formal and substantive grounds for enforcing bargained-for exchanges. Formal grounds, which have to do with the “circumstances surrounding” the making of a promise,³⁴ include the “evidentiary,” “cautionary,” and “channeling” functions of consideration. Let’s look at these first.

By enforcing bargained-for exchanges, Fuller posited that contract law satisfies “[t]he need for evidentiary security,”³⁵ meaning that a bargained-for exchange tends to produce evidence that a promise was really made. The bargained-for exchange requirement certainly is not the only method of generating evidence of promises, however. For example, contract law could have required all contracts to be in writing. Perhaps contract law settled on the bargained-for exchange requirement because exchanges are likely to generate sufficient evidence of the existence of a contract without unduly impeding parties who want to make enforceable promises. Of course, contract law also could have enforced written gift promises, which approach obviously would have satisfied the “evidentiary function.” The evidentiary function alone therefore cannot explain the distinction between unenforceable gift promises and enforceable bargained-for exchanges.

A bargained-for exchange also cautions the parties about the seriousness of what they are doing. Fuller reasoned that an exchange would more likely alert the parties to the legal ramifications of their acts and promises than a gift promise.³⁶ His view was that people make gift promises all of the time, often without thinking through what they are doing. (I certainly have made my share of such promises. Come on, admit it. So have you.) Recall, for example, our discussion of Dougherty v. Salt,³⁷ where Helena Dougherty made her nephew, Charley, a promise of $3000 because she wanted to “take care” of him. Remember how Charley’s guardian goaded Helena into making her promise by telling her not to “take it out in talk.”³⁸ One suspects that at least one of the reasons contract law does not enforce promises such as Helena’s is to protect promisors from such ill-advised and thoughtless promises. A party entering an exchange transaction has to jump through more hoops and therefore is more likely to be forewarned about the legal ramifications of what she is doing. Requiring a writing also cautions parties, but perhaps not as effectively as the formal requirement of a bargained-for exchange.

Finally, Fuller thought that the bargain theory satisfied the channeling function. Reading Fuller on the channeling function is a bit of a challenge, but the gist is that the bargained-for exchange requirement offers parties a recognizable method of entering an enforceable obligation. In other words, the bargained-for exchange requirement constitutes a distinct set of instructions for parties who want to enter an enforceable exchange. (I told you this one was tough.) According to Fuller, the context of gift promising is too amorphous to constitute clear instructions for creating a legal obligation.³⁹ For example, Fuller thought that it would be very difficult for a gift promisor to show the requisite intention to be bound, as opposed to a “tentative” intention to confer a gift.⁴⁰ This reasoning does not seem very persuasive, especially when one considers the possibility of enforcing written gift promises.

Fuller also accounted for the “substantive bases of contract liability,” which have to do with the characteristics and importance of exchanges, not how they were made.⁴¹ For example, he observed that enforcing bargained-for exchanges supports the principle of “private autonomy” because people can create their own legal relations through their exchange transactions.⁴² In addition, enforcing bargained-for exchanges protects people who rely on their agreements. Further, Fuller noted that when such reliance benefits the other party as in “half-completed exchanges” (for example, suppose Alice pays for your piano before you deliver it—she has relied, you have benefitted), the reason for enforcing promises is strongest because one party has detrimentally relied and the other has been unjustly enriched.⁴³

These substantive reasons for enforcing promises are not much help in explaining the distinction between gift promises and bargained-for exchanges. After all, enforcement of gift promises supports a promisor’s freedom to make a gift. Enforcement also protects a promisee who relies on a gift promise, which reliance can benefit the promisor (such as when a promisee reciprocates for a gift promise by conferring a benefit on the promisor). Fuller has one more argument, however. Fuller’s further explanation for the distinction between gift promises and bargained-for exchanges is that gift promises are more likely than bargained-for exchanges to constitute “sterile transmissions,”⁴⁴ meaning that gift promises do not contribute to the “production of wealth and the division of labor,” nearly as much as exchange transactions.⁴⁵ In sum, exchange transactions are more important than gift promises and therefore require all of the resources of the law.

As you might guess, many others have spilled lots of ink discussing the reasons contract law enforces bargains, but not gift promises.⁴⁶ The explanations vary, but one of the more interesting ideas is that contract law fails to enforce gift promises, not because they are relatively unimportant, as posited by Fuller, but for precisely the opposite reason.⁴⁷ Gift promises would lose their symbolic meaning if they were legally enforceable:

The world of gift is a world of our better selves, in which affective values like love friendship, affection, gratitude, and comradeship are the prime motivating forces. These values are too important to be enforced by law and would be undermined if the enforcement of simple, affective donative promises were to be mandated by the law.⁴⁸

6.Adequacy of Consideration

If you are with me up to this point, you now understand that contract law enforces bargained-for exchanges and you have been exposed to several explanations for this approach. But we cannot leave this subject without introducing several additional rules and principles governing the enforcement of bargained-for exchanges.

One of the “principles” of contract law that you will read over and over again in judicial opinions is that courts are not supposed to weigh the adequacy of consideration.⁴⁹ The parties should decide what something is worth and third parties (i.e., government officials such as judges) should not interfere with their decision. In this way, private parties create their own law to govern their private transactions. As early as 1851, a court, considering whether a worthless invention was good consideration for a promise to pay for it, captured this principle in the following way:

[W]here one person examines an invention to the use of which another has the exclusive right, and, upon his own judgment, uninfluenced by fraud or warranty, or mistake of facts, agrees to give a certain sum for the conveyance of that right to him, such conveyance forms a valid consideration for such agreement. The judgment of the purchaser is the best arbiter of whether the thing is of any value, and how great, to him.⁵⁰

The Restatement (Second) of Contracts adopts this position on adequacy of consideration in section 79: “If the requirement of consideration is met, there is no additional requirement of * * * equivalence in the values exchanged * * *.”⁵¹

As with all rules, even long-standing, well-accepted ones, we will see in Chapter 6 that the adequacy rule is subject to several exceptions. As a general matter, for now, understand that many courts feel uncomfortable enforcing imbalanced exchanges, especially when the imbalance is severe. In fact, inadequacy of consideration may serve as a red flag that one party unfairly took advantage of the other at the formation stage and that the exchange should not be enforced. Doctrines such as unconscionability, duress, and misrepresentation, authorize courts to strike contracts made unfairly and often at least part of the evidence of unfairness derives from the inadequacy of consideration.⁵² Contract law thus includes both an admonishment to courts to keep out of the parties’ private exchange and an invitation to courts to police agreements for unfairness. For now, the best I can offer to harmonize these contradictory tendencies of contract law is to say that a promisor usually is fighting an uphill battle when she urges the lack of enforceability of a promise solely because of the inadequacy of the exchange.⁵³

7.Mutuality of Obligation and Illusory Promises

Recall our discussion of the “bilateral executory exchange.”⁵⁴ You saw that this is an exotic name for the simple concept of when an agreement consists of promises by both sides that the parties have not yet performed. Such an agreement is enforceable because both promises are supported by consideration, namely the return promises.⁵⁵ But suppose your “agreement” consists of a promise by Alice to pay you $400 for your piano in exchange for your statement that you will sell the piano “if you want to.” Contract law treats your statement as an illusory promise, meaning no promise at all, and finds the “agreement” unenforceable for lack of “mutuality of obligation.”⁵⁶ The agreement lacks an obligation on your part because you haven’t promised to do anything. You have reserved the right not to deliver the piano.

Some of the cases on mutuality of obligation are not as straightforward as the above example, but they all boil down to the question of whether a promise is real or illusory. For example, in De Los Santos v. Great Western Sugar Company,⁵⁷ De Los Santos was a trucking company that “agreed” to transport in its trucks “such tonnage of beets as may be loaded” by Great Western from Great Western’s supply of beets. De Los Santos’s compensation depended on how many beets it carried for Great Western. At the time of the agreement, De Los Santos knew that Great Western had entered identical agreements with other carriers. When Great Western terminated the arrangement with De Los Santos, the latter claimed that Great Western had broken the agreement. Great Western insisted that it had the right under the agreement to use other transporters and to exclude De Los Santos.

The court concluded that Great Western “made no promises at all other than the promise to pay for the transportation of those beets which were in fact loaded by [Great Western] onto the trucks of [De Los Santos] * * *.”⁵⁸ In other words, Great Western had no obligation to De Los Santos to load any beets, so Great Western had the right to terminate De Los Santos. In the parlance of contract law, the parties’ arrangement was void for lack of mutuality of obligation (Great Western was not obligated to do anything), so De Los Santos had no rights.

Although not discussed in the opinion, you should realize that an arrangement that is unenforceable for lack of mutuality of obligation is not enforceable by either party. Thus, Great Western could not recover from De Los Santos if the latter repudiated the agreement before Great Western had loaded any beets. De Los Santos’s promise to transport beets was an unenforceable gift promise precisely because Great Western had not committed itself to do anything in return. On the other hand, once Great Western loaded some beets a contract would be formed, but only for that quantity of beets.

Sometimes language appears to be an illusory promise, but the circumstances demonstrate that the promisor really did intend to commit itself. Courts often interpret such language as a binding promise even though in form there is no promise. For example, in the famous case of Wood v. Lucy, Lady Duff-Gordon,⁵⁹ Wood had the exclusive right to place Lucy’s indorsements of fashion designs on clothing and to place Lucy’s own designs on sale. The parties agreed to split the profits. After Lucy placed her indorsement on fabrics herself and kept the profits, Wood sued her for breach of contract.

Lucy’s defense was that Wood had not obligated himself to do anything (just as Great Western had not bound itself), so their agreement was unenforceable. Although Judge Cardozo saw that Wood had not “promise[d] in so many words that he [would] use reasonable efforts to place the defendant’s indorsements and market her designs,” the judge implied just that promise.⁶⁰ In a well-known passage, Judge Cardozo stated “[a] promise may be lacking, and yet the whole writing may be ‘instinct with an obligation,’ imperfectly expressed. If that is so, there is a contract.”⁶¹

What circumstances proved that the arrangement was “instinct with an obligation” on Wood’s part?⁶² Cardozo observed that Lucy would not have granted an exclusive right to Wood if he hadn’t committed himself to do something. Lucy would receive no profits unless Wood made some effort. In addition, Wood was obliged to “account monthly” in order to determine how much he owed Lucy. Therefore, “[w]ithout an implied promise, the transaction cannot have such business ‘efficacy as both parties must have intended * * *.’ ”⁶³ The court therefore found an implied promise that Wood use “reasonable efforts to bring profits and revenues into existence.”⁶⁴ This commitment by Wood meant that the contract was not unenforceable for lack of mutuality of obligation because both parties were bound. Therefore, Wood could recover for Lucy’s breach.

“Reasonable efforts” is not the only implied promise courts employ to find a commitment so that an agreement is not void for lack of mutuality of obligation. For example, some cases involve what are called “satisfaction” clauses. Suppose you promise to purchase a water-color picture of your house “if you are satisfied with the picture.” Strictly speaking, you could argue that you had not entered an enforceable contract at all because you could arbitrarily decline to be satisfied with the painting. However, many courts interpret satisfaction clauses to require “good faith” on the part of the promisor (the party who must be satisfied).⁶⁵

The good faith obligation means that your decision about whether you are satisfied with the picture must be reasonable or honest.⁶⁶ A court applying a reasonableness standard of good faith would compare your picture with comparable pictures at similar prices. You could not decline the picture if it compared favorably to the other pictures. A court applying an honesty standard of good faith satisfaction would determine whether you truly were dissatisfied or whether you had some ulterior motive for refusing to take the picture. For example, if you said you were dissatisfied with the quality of the picture, but actually declined to accept it because you disagreed with the painter’s politics, a court would find you in bad faith for being dishonest—you fibbed about your reasons for declining the picture.

How do courts determine which standard of good faith satisfaction to follow? Generally, if the satisfaction clause deals with “commercial value or quality, operative fitness, or mechanical utility” courts generally apply the reasonableness test.⁶⁷ Satisfaction can easily be compared with other market alternatives. When satisfaction involves “fancy, taste, or judgment,” courts apply the honesty test.⁶⁸ In the picture contract, where satisfaction depends on how much you like the picture, courts would therefore likely apply the honesty test.⁶⁹

Courts find mutuality of obligation in “satisfaction clause” cases by implying an obligation of “good faith” satisfaction for the same reason that Judge Cardozo found the Wood-Lucy contract “instinct with an obligation,” namely because courts believe the parties probably intended these results. Further, the particular gap-filling approach in satisfaction clause cases—honesty or reasonableness—also depends on finding the likely intentions of the parties. You and the painter probably believed that you would decide whether you were satisfied based on your view of the quality of the picture and not based on some petty complaint about the painter’s politics. Nothing would stop you from insisting on a provision allowing you to refuse the painting for the latter or another arbitrary reason, but a court would then probably find the agreement unenforceable for lack of mutuality of obligation. In the absence of such a provision, however, a court would find that you and the painter intended to make an enforceable contract in which you would determine your satisfaction honestly.

Courts also find mutuality of obligation even if, according to the contract, a party can terminate the contract simply by giving notice (usually within a limited time period). An early management contract between Brian Epstein and the Beatles (by far, the best band ever), for example, authorized the Beatles to terminate the contract on three-months’ notice. To cite another example, Ford Motor Company’s contract with suppliers at one time allowed Ford to terminate “upon Written Notice to the Supplier.” Two noted contract scholars observed that “the requirement of a written notice in Ford’s contract * * * may constitute the necessary restriction to render these contracts enforceable.”⁷⁰

This section on mutuality of obligation began with a brief discussion of when the problem arises, namely when the contract at issue is an executory bilateral exchange. In other contexts, the mutuality requirement simply doesn’t apply. For example, suppose an employer promises an employee $60,000 per year if the employee quits another job and comes to work for the employer. The employer also promises not to fire the employee for at least one year. Suppose further, that the employee does quit the other job and begins to work for the employer, but the employee does not bind herself to stay in the new job for any particular period of time. As you can guess, this story ends unhappily when the employer fires the employee within a year and claims the promise of one-year of employment was void for lack of mutuality of obligation. The employer asserts that the employee can quit at any time and therefore has no obligation to the employer.⁷¹

The employer correctly asserts that the employment arrangement lacks mutuality of obligation, but the employer should still be liable to the employee. This is because the employee has already supplied the consideration to support the employer’s promise of one-year employment. Remember, the employee quit her other job and came to work for the employer as the price of the employer’s promise of one-year of employment. Quitting the job and working for the employer was therefore consideration to support the employer’s promise even though the employee could quit at any time.⁷²

8.Preexisting Duty Doctrine and Accord and Satisfaction

Suppose you and Alice enter a contract for the sale of your piano for $400. (Sound familiar?) You then realize that the fair market value of the piano is $500, so you ask Alice to split the difference by agreeing to a price increase of $50. She agrees and you deliver the piano. She then says she will pay you only $400, “according to the contract.” Are you entitled to the additional $50?

Contract law’s traditional answer to this question was no. You had already promised to sell the piano for $400, so you had the “preexisting duty” to deliver at that price. Alice’s promise to pay $50 more therefore was not supported by consideration and was a mere gift promise.⁷³

This result caused trouble whenever a court believed that the parties made their modification agreement voluntarily and fairly, such as above. After all, contract law is supposed to enforce parties’ freely-made agreements, so why shouldn’t the law enforce their freely-made modification agreements? In addition, the cautionary role of consideration appears to be satisfied, without the need for new consideration to support the modification. You and Alice already negotiated a contract for the sale of your piano, so you should understand the seriousness of what you are doing.⁷⁴

Courts therefore began to devise ingenious methods of avoiding the preexisting duty rule. For example, in Schwartzreich v. Bauman-Basch, Inc.,⁷⁵ Schwartzreich agreed to a one-year employment contract with Bauman-Basch for $90 per week. After another employer offered Schwartzreich more money, Schwartzreich and Bauman-Basch wrote a new contract in which Schwartzreich’s compensation was $100 per week. Bauman-Basch then fired Schwartzreich, who brought an action seeking compensation based on the $100 per week salary.

Although the court recognized the problem of the preexisting duty rule—Schwartzreich already had promised to perform for $90 per week, so Bauman-Basch’s promise of an additional $10 per week was not supported by consideration—the court affirmed a jury verdict enforcing Bauman-Basch’s promise of $100 per week. The court approved the trial judge’s instruction to the jury that, if the parties had rescinded the original contract before or at the same time they made the new contract, Schwartzreich did not have a preexisting duty to perform for $90 and his promise to work was good consideration for the promise of $100 per week.⁷⁶

Of course, the court’s method of avoiding the preexisting duty doctrine goes too far. In reality, in every case that contracting parties modify their agreement, they have implicitly agreed to rescind the original contract. After all, they are trying to change that contract and certainly do not intend for it to trump the new agreement. It is true that both parties in Schwartzreich testified that they wrote a formal new contract and surrendered the old one,⁷⁷ but contract law should not and does not depend on such formalisms.

What really seemed to motivate the court was its acceptance of Schwartzreich’s testimony that Bauman-Basch voluntarily agreed to the increased compensation after learning that Schwartzreich had received a better offer from a third party and after Schwartzreich asked Mr. Bauman, an officer of Bauman-Basch, what he should do.⁷⁸ One suspects that if the court had accepted Bauman’s alternative explanation that Schwartzreich wanted to leave because “someone offered him more money” at a time when Schwartzreich’s services were crucial to Bauman-Basch’s business, the court might have found a way to decide in favor of Bauman-Basch.⁷⁹ In such a case, the court would have been concerned that Schwartzreich had extorted Bauman-Basch’s promise.

If courts manipulate the preexisting duty rule to reach decisions based on whether the modification agreement appears to be voluntary, contract law should move to a new rule that focuses on the voluntariness question. In fact, contract law has answered the call. For example, in sale-of-goods cases, Article 2 of the UCC provides that “[a]n agreement modifying a contract within this Article needs no consideration to be binding.”⁸⁰ An “official comment” to the section imposes a test of good faith on the party benefitting from the modification. If that party’s conduct constitutes “the extortion of a ‘modification’ without legitimate commercial reason * * *,” the modification will not be enforceable.⁸¹

In our example of the sale of the piano, for example, Alice’s promise to pay the extra $50 would be enforceable only if you negotiated the additional compensation in good faith. Because you learned that the fair market value was greater than you thought and asked whether Alice would split the difference, you do not appear to be extorting a modification. But suppose you learned, after contracting for $400, that Alice was a concert pianist who needed the piano for practice for a major performance and could not get one in time elsewhere. (Law school hypos don’t have to be realistic, right?) Knowing Alice’s plight, you demand $900 for your piano, even though its market value is only $500. Under section 2–209(1), Alice’s agreement to pay the extra $500 ($900 minus $400) would be unenforceable because of your bad faith.

In cases that do not involve the sale of goods, the common law applies. Although some courts still apply the preexisting duty rule,⁸² many have followed the Restatement (Second) of Contracts, which provides: “A promise modifying a duty under a contract not fully performed on either side is binding (a) if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made * * *.”⁸³ This approach improves the preexisting duty rule by removing the focus on consideration. However, by requiring “circumstances not anticipated,” the rule discourages enforcement of many voluntary modification agreements. For example, Alice’s promise to pay $50 more after you realize the true market value of your piano is $500 and Bauman-Basch’s promise to pay an extra $10 per week may not be enforceable under the Restatement’s standard because those modification agreements arguably did not arise because of unanticipated circumstances.⁸⁴

Before we leave modification agreements and the preexisting duty doctrine, we should consider a related issue. Recall our original hypo in this subsection involving you and Alice, where Alice insists on paying you only the $400 contract price for your piano despite having agreed to pay you $450 because the market value of the piano was $500. Understandably, you are upset and complain to her. Suppose Alice then offers to pay you $425 by check in full settlement of all claims you have against her under the piano contract. Suppose further that she has a viable argument based on the preexisting duty rule that she is only liable to you for $400. This is a very common scenario, but what should you do? Should you accept $25 less than you believe Alice owes you or should you refuse with the hope of receiving the full $450? If you accept Alice’s check for $425 marked with the notation “in full settlement,” can you then go after her for the additional $25?

Contract law treats Alice’s tender of the $425 check marked “in full settlement” as an offer for an “accord and satisfaction.” If you indorse the check and receive payment, you have accepted the offer of an accord and satisfaction. Because the amount she owes you is subject to dispute (remember, we’re assuming this), the accord and satisfaction is supported by consideration. She pays $25 more than she may owe, you accept $25 less than you think she owes. Alice is therefore discharged from any obligation she might have had to pay you the additional $25. By the way, you can’t get crafty and attempt to reserve your rights to the additional $25 by scratching out the full settlement language before cashing the check.⁸⁵ (Later, we will illustrate how parties can preserve their rights in situations that do not involve a tender of a check to settle a dispute.⁸⁶)

This is fun (right?). Let’s introduce some more terminology. Suppose that on July 1 Alice promises to give you a $425 check for the piano on August 1 and you agree to this settlement. You and Alice have entered what is called an “executory accord.”⁸⁷ If Alice pays you on August 1 and you cash the check, the executory accord ripens into an accord and satisfaction. Again, it is then too late for you to change your mind and recover the additional $25. The accord and satisfaction is a defense to such a claim.

What if on July 15 Alice proclaims that she doesn’t have to pay you anything? She follows through and you receive nothing from her on August 1 or later. Alice has failed to turn the executory accord of July 1 into an accord and satisfaction. Can you now seek $450 from Alice? The answer depends on the intention of the parties on July 1 (when you agreed to the settlement) as to what should happen if Alice fails to pay you the $425 on August 1. In this context, contract law adopts a rebuttable presumption that you and Alice intended that you can pursue the $450, on the theory that you would not intend to accept a mere promise of $425 as a substitute for an existing promise of $450. You would only give up your right to $450 for an actual payment of $425. You are economically rational aren’t you?

This is all spelled out in section 279 of the Restatement (Second) of Contracts. The section defines a “substituted contract” as “one that is itself accepted by the obligee in satisfaction of the original duty and thereby discharges it.” According to Comment a, “[i]f the parties intend the new contract to replace all of the provisions of the earlier contract, the contract is a substituted contract.” Thus, in our example, if you and Alice intended your July 1 agreement for Alice to pay you $425 to replace the original $450 agreement, then Alice’s duty to pay $450 is discharged even though Alice did not perform at all. You can only sue for $425. But as I have just mentioned, contract law presumes that the settlement agreement on July 1 is an executory accord and not a substituted contract because a rational creditor would not accept a mere promise to pay only part of a debt in substitution for a promise to pay the full amount.

One final point (I promise). For now, forget all the previous hypos. Suppose you enter a contract with Alice for the sale of your piano for $400 and you deliver the piano on July 1. She refuses to pay and you get a judgment against her. Alice then agrees to pay you $375 in full settlement. Contract law is pretty adamant that even if you accept the $375, you can still collect the final $25. Partial payment in this scenario, even if beneficial to you because you receive payment sooner and don’t have to pursue enforcement of the judgment, runs afoul of the preexisting duty rule.

9.Promise for Benefit Received

Think back (for the second time) to our discussion of Dougherty v. Salt,⁸⁸ where Helena Dougherty promised her nephew, Charley, $3000 because he “ha[d] always done” for her.⁸⁹ We said that even if he had performed services for her or otherwise benefitted her, Helena’s promise after she received the benefit would not be enforceable. At the time Helena made her promise, she had already received the benefit from Charley so she could not have made her promise to extract that benefit. Contract law declines to enforce such promises based on the promise-for-benefit-received theory (also called the “past consideration” doctrine).⁹⁰

Harrington v. Taylor⁹¹ presents a particularly dramatic example of the promise-for-benefit-received bar to enforcing promises. Husband assaults Wife who runs to Neighbor’s house. Husband begins assaulting Wife again in Neighbor’s house. Wife knocks Husband down with an ax and launches a final blow to decapitate him. Neighbor intervenes and takes the blow intended for Husband on her hand, mutilating it. Later, Husband promises to pay Neighbor’s damages. It is not hard to predict that, after paying a small amount, this despicable moron of a husband breaks his promise. Is his promise legally enforceable?

One might hope that the court would find a way to enforce Husband’s promise. But in a very short legal opinion, the court had no trouble dismissing Neighbor’s lawsuit. Characterizing Neighbor’s act as “humanitarian” and “voluntary,” the court stated that it was “not such consideration as would entitle her to recover at law.”⁹² The court could have added that Husband made the promise after he had already received the benefit, so he did not extract anything from Neighbor in return for his promise, meaning that there was no consideration to support his promise.⁹³

Another promisor also avoided liability based on the past consideration theory in Mills v. Wyman.⁹⁴ Mills cared for Wyman’s 25-year-old son, Levi, who was ill in Hartford, while Wyman was some distance away in Shrewsbury. Apparently the care administered included hiring two guards because Levi was “ ‘in [a] derang’d state’ ” and had “ ‘leaped out of a chamber window.’ ”⁹⁵ After Mills had incurred all of the expenses, Wyman promised in a letter to Mills to pay Mills’ expenses.⁹⁶ Although the court remarked that “in good conscience” Wyman should keep his promise, the court declined to enforce the promise legally because of the lack of consideration to support it.⁹⁷

Perhaps you are outraged by these results. But proponents of legal rules assert that any judicial deviation from them based on a court’s sense of fairness creates ambiguity and uncertainty in the law.⁹⁸ In fact, the Mills court wrestled with just such a concern. The court saw that contract law had already enforced promises for benefit received in three distinct situations involving promises to pay debts barred by bankruptcy, the statute of limitations, or infancy. For example, a debtor may be insulated from legal liability based on bankruptcy, the passage of time, or her age when she incurred the debt, but then make a new promise to pay the debt. Contract law enforced such promises even before the Mills case. But the Mills court saw that in all of those instances, the parties had a contract that had become unenforceable (so that the reasons for enforcing exchange agreements applied) and that enforcing Wyman’s promise, where there had been no previous bargained-for exchange, would be a serious expansion of promissory liability. In fact, the logical extension of enforcing Wyman’s promise, the court believed, was to enforce all moral obligations, whether a promise was made or not:

If moral obligation * * * is a good substratum for an express promise, it is not easy to perceive why it is not equally good to support an implied promise. What a man ought to do, generally he ought to be made to do whether he promise or refuse * * *. Without doubt there are great interests of society which justify withholding the coercive arm of the law from these duties of imperfect obligation, as they are called; imperfect, not because they are less binding upon the conscience than those which are called perfect, but because the wisdom of the social law does not impose sanctions upon them.⁹⁹

The Mills court plainly did not want to contradict this “wisdom of the social law.”¹⁰⁰

Whether enforcing the promises of Wyman and Taylor would have created too much ambiguity in the law is debatable. After all, Wyman’s promise was in writing and Taylor had begun making payments before he reneged. These acts could have served as distinct grounds for an extension of liability. Some courts have made this leap, but not based on clear reasoning. For example, in Webb v. McGowin,¹⁰¹ Webb saved McGowin from a falling pine block in the employer’s mill by directing the block away from McGowin and falling with it. Webb sustained serious injuries and McGowin promised to “care for and maintain” Webb for the rest of his life. McGowin paid $15 every two weeks as per the agreement for more than eight years, but McGowin’s testator (the party representing his estate) refused to pay any longer after McGowin’s death.

The court held that a complaint alleging these facts was legally sufficient. The court held that Webb had materially benefitted McGowin and that the latter was “morally bound to compensate” Webb.¹⁰² So far, so good. Next, ignoring reality, the court claimed that the material benefit was “sufficient consideration for [McGowin’s] subsequent agreement to pay for the services * * *.”¹⁰³ The court reasoned that the “subsequent promise” by McGowin was “equivalent to a previous request.”¹⁰⁴ Finally, the court wrote that McGowin’s promise “rais[ed] the presumption that the services had been rendered at McGowin’s request.”¹⁰⁵

Webb v. McGowin may have reached the right result, but for the wrong reason. Instead of muddying up the works by creating legal fictions about implied previous requests in order to satisfy the requirement of consideration, the court could have more directly declared that promises for benefit received are enforceable as a distinct obligation (separate from bargained-for-exchange) whenever a promisee materially benefits a promisor, not intending a gift, and the promisor then makes a promise to pay for the benefit. The complaint alleged that Webb had not conferred the benefit gratuitously (apparently because Webb performed his services in the workplace), which the court had to accept as true for purposes of the motion to dismiss.

The Restatement (Second) of Contracts declares directly that a promise “made in recognition of a benefit previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice.”¹⁰⁶ Promises are not binding under the Restatement approach if the promisee intended to make a gift of the benefit or the promisor “has not been unjustly enriched.”¹⁰⁷ In addition, if the value of the promise is “disproportionate to the benefit”¹⁰⁸ the promise is enforceable only up to the value of the benefit.¹⁰⁹ For an example of the latter point, if you mow Alice’s lawn, expecting compensation, and she is so grateful that she promises you $1000 for your work, her promise will only be enforceable up to the fair value of the benefit.

10.Summary

You may be thinking about now that the bargain theory of consideration is a mess. Courts sometimes investigate the adequacy of consideration even though the adequacy of an exchange is supposed to be up to the parties. The line between gift promises and those supported by consideration is anything but clear. Courts manipulate the preexisting duty doctrine based on whether they believe a promise was voluntary. Courts enforce some promises based on “past” consideration. Analysts have a hard time explaining the reasons supporting the bargain theory.¹¹⁰ However, despite the fogginess of the bargain theory, perhaps the requirement of consideration is simply the best the law can do to delineate those promises that society should enforce. The theory allows courts to ward off those promises too inconsequential for legal enforcement or too costly to administer. In fact, the bargain theory’s lack of coherence may serve society by allowing courts to expand promise enforcement as circumstances change and as justice and fairness require.

A controversy percolating at the time of this writing suffices as an example of how the bargain theory can adapt to new technologies and social movements. You may have heard about the “free and open source” software movement (FOSS). Much simplified (not because you are not “with it,” but because this is a bit technical), as the name suggests, FOSS software is not only free, but its source code, unlike proprietary software, is available to those who want to modify or improve it. (Source code is what the computer programmer writes that communicates with and instructs the computer.) Why give away software and allow users to experiment with and improve it? Collaborators in the movement want to “maximize the ongoing use, growth, development and distribution of free software.”¹¹¹ But there is a catch. To further the goal of openness, among other things, users of the software usually must reveal to their own transferees the source code of any software that they modify and must transfer the software under the same terms that governed the transfer to them.¹¹²

Is the bargain theory of consideration flexible enough to capture FOSS transactions? In a word, “yes.” Remember that courts find consideration if a condition constitutes more than is necessary to transfer a gift.¹¹³ Terms in software licenses that require the software transferee to keep the source code “open” and that require the transferee to use the same terms in its own transfers of the software are more than are necessary to transfer the software and therefore constitute consideration to support the transfer. And remember, transferors want to advance their philosophy of openness, so at least some of their motive for including these terms is to extract them as the price of the software.¹¹⁴ Transferors may also have economic motives for licensing FOSS software. As my coauthor and I point out in an important (at least in my mind) article:

A licensor may benefit indirectly, for example, by entering lucrative service and update contracts or by gaining publicity for other more entrepreneurial projects. Even without such benefits, collaborators work in a “gift culture in which members compete for status by giving things away.” Contract law * * * long has recognized that a motive to increase one’s standing as opposed to pure altruism may be sufficient to constitute consideration. Further, developers learn state-of-the-art technology and “build their reputation[s]” by participating in the open source movement. Thus, consideration supports open source software license grants under traditional contract law.¹¹⁵

Notwithstanding this analysis, you might claim that FOSS licenses are no different than when you invite Alice to your apartment, but tell her she must leave by 4:00 a.m. (after all, you have to study). You have granted Alice a license to enter your apartment, but with a restriction. However, this restriction simply narrows the scope of your invitation and courts should consider it only a condition for a gift. On the other hand, a FOSS license does more than define the boundaries of a gift, it creates affirmative obligations. If you required Alice to use any information she acquired, say by studying with you, in a particular way (for example, you won’t let her share it with your rival), then your invitation would constitute a bargain.

Not only does contract law thus supply the framework for FOSS licenses, it facilitates them. And that is a good thing because open source software is important and we should want it to succeed. Many of the programs you use on your computer are open source. Further, there is no doubt that these programs compete admirably with, or may be better than, proprietary software. For these reasons, we want a framework that will facilitate further development. If you believe that contract law supports private exchange, clarifies rights and duties, and provides appropriate remedies, then we should be happy that contract law applies here.¹¹⁶

B. THE REQUIREMENT OF AN AGREEMENT

Part A dealt with the concept of a “bargained-for exchange.” A bargained-for exchange is one kind of agreement.¹¹⁷ (People can make agreements that do not constitute a bargained-for exchange. For example, you and Alice can agree that you will give her your piano as a gift.) Part B illustrates how contract law distinguishes mere talk, negotiations, and preliminary drafts from the formation of an enforceable bargained-for exchange. Some lawyers and students refer to agreement-law issues as the law of offer and acceptance. But we will see that the reach of agreement law is much longer, including, among other things, the formation of huge deals between large corporations based on multiple drafts without a sequence of offer and acceptance at all.¹¹⁸

1.The Objective Test of Assent

We have already mentioned the example of Alice trying to “trap” you into making a contract, when your clearly manifested intent was only to negotiate.¹¹⁹ Recall that Alice’s attempt to bind you legally would fail. However, if you outwardly expressed an intention to be bound, for example, “I promise you this piano for $400, and will deliver it promptly upon your acceptance,” Alice could form a contract by accepting your offer, even though you were really joking. In short, under the objective test of assent, contract law generally enforces the apparent, not necessarily real intention of the promisor.¹²⁰

Nowhere is this point made more dramatically than in the classic case of Lucy v. Zehmer.¹²¹ Lucy and Zehmer were enjoying cocktails at a restaurant and chatting. Lucy offered Zehmer $50,000 for Zehmer’s farm, which Zehmer had refused to sell to Lucy in the past. Zehmer claimed that he thought Lucy made the offer in jest. Zehmer also asserted that he decided to play along and therefore wrote on the back of a guest check, “We hereby agree to sell to W.O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer.”¹²² Both Zehmer and his wife then signed the writing. Zehmer also claimed that he was “high as a Georgia pine” at the time of these events and that they were “just a bunch of two doggoned drunks bluffing to see who could talk the biggest and say the most.”¹²³

Lucy and his wife sought to enforce the writing through a court order called specific performance. (We cover this remedy in Chapter 5, Section (A)(8).) First, the court discounted Zehmer’s claim that he was drunk, primarily because he was able to testify about what had occurred.¹²⁴ Next, the court found “persuasive” evidence that the parties’ agreement was a “serious business transaction rather than a casual, jesting matter.”¹²⁵ For example, the parties negotiated for forty minutes, they wrote two drafts, and they had Mrs. Zehmer sign the contract. In addition, the court noted the “the completeness of the instrument,” which suggested a serious business deal.¹²⁶

You may be asking yourself about now whether this court is for real. Obviously, lots of evidence suggested that Zehmer was joking, such as the setting of the “negotiations,” the drinking, and Zehmer’s previous reluctance to sell the farm. In addition, with respect to the “completeness of the agreement,” compare the handwritten agreement scribbled on the back of a guest check with the more usual three or four page printed form contract to purchase real estate, which includes, among other things, long descriptions of the property, title provisions, mortgage commitments, and provisions on the closing. Whether the court made accurate fact findings, however, is less important than understanding the law the court applied to the facts it did find.

The court ruled that it “ ‘must look to the outward expression of a person as manifesting his intention rather than to his secret and unexpressed intention.’ ”¹²⁷ According to the court, Zehmer’s actual intentions therefore were irrelevant. What was important was Lucy’s reasonable belief based on Zehmer’s behavior. The court held that the parties entered an enforceable contract even if Zehmer was not serious because Lucy reasonably believed Zehmer was serious.¹²⁸

Although contract law does not care about Zehmer’s (the promisor’s) subjective beliefs, Lucy’s belief about Zehmer’s intentions must be both reasonable and honest, according to most courts.¹²⁹ Contract law seeks to protect promisees who rely on their contracts and to encourage such reliance, something that would be impossible if a promisor could avoid liability simply by claiming that he was joking.¹³⁰ Nevertheless, it is hard to find a reason for enforcing a promise that appears serious when the promisee actually knows that the promisor was joking. Such a promisee has no moral claim for enforcement, nor would any expectations about or reliance on the “promise” be reasonable. Therefore, if Lucy actually knew that Zehmer was joking, contract law should not enforce their agreement.

Lucy v. Zehmer teaches us not to be fooled by the barrage of language in judicial decisions about enforcing the parties’ intentions¹³¹ or looking for a “meeting of the minds.”¹³² In reality, the objective test of assent trumps actual intentions. Judge Learned Hand (what a great name for a judge) saw this in an often-quoted passage:

A contract has, strictly speaking nothing to do with the personal, or individual, intent of the parties. * * * If * * * it were proved by twenty bishops that either party, when he used the words, intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake, or something else of the sort.¹³³

In fact, contract law may have always applied an objective approach to contract formation,¹³⁴ despite the propensity of courts, especially in the nineteenth century, to fill their opinions with language about the “will theory” of contract (promises are enforced according to the subjective wills of the parties).¹³⁵

From this discussion, you should understand that contract law evaluates a promisor’s intent to contract objectively, meaning that contract law enforces an agreement when a reasonable person would believe the promisor intended to be bound (and the promisee actually believes it). Contract law determines what a reasonable person would believe by examining the circumstances, including the language of the alleged agreement, the length of negotiations, the subject matter of the contract, the setting of negotiations, the previous conduct of the parties, the relationship of the parties, and anything else that may be relevant.¹³⁶ Moreover, the objective test applies whether the promisor claims that he was joking, as in Lucy v. Zehmer, mistaken,¹³⁷ or misunderstood.¹³⁸ Finally, we are about to see that courts apply the objective test of assent to the many issues of contract formation discussed below.

2.Offer and Acceptance

Probably most prospective contracting parties form their agreements after some back and forth. For example, a retail store might place an advertisement in a newspaper but leave out most of the details, thereby inviting buyers to come to the store to consider purchasing the goods. Several communications and meetings may preface a business deal, including huge ones between corporate titans and more modest ones between small entrepreneurs. You and Alice may engage in several discussions about the sale of your piano. In each of these settings, a dispute may arise about whether the parties ever committed themselves to a deal. Contract law must resolve these disputes clearly and consistently in order to give contracting parties the guidance they need and desire.

Contract law’s general approach is to look for a particular communication that constitutes an offer and another communication that constitutes an acceptance. An offer and acceptance form an agreement that is legally enforceable (a contract). We will see later that some transactions do not lend themselves particularly well to this analysis because of their complexity and the absence, realistically, of any particular time when contract law can confidently find that the parties have reached an agreement. However, we should first understand the traditional approach to offer and acceptance before immersing ourselves in the complexities.

a.Offer

According to one of the leading treatise writers of the twentieth century (in any legal field), Arthur Corbin, “[a]n offer is an expression by one party of assent to certain definite terms, provided that the other party involved in the bargaining transaction will likewise express assent to the same terms.”¹³⁹ Note first that an offer is “an expression * * * of assent,” not necessarily actual assent. This is consistent with the objective test of assent we have just investigated.¹⁴⁰ According to Corbin’s definition, contract law must determine whether a reasonable person, acquainted with all of the circumstances, would believe that the author of the communication alleged to be an offer intended to be bound upon assent (acceptance) by the other party.

Suppose, for example, that a department store advertises “1 Black Lapin Stole Beautiful, worth $139.50 . . . $1.00. First Come First Served.”¹⁴¹ If you trotted down to the store, showed up first, and requested to purchase the stole, would the store be bound to sell it to you for $1? This depends on whether the store’s communication was an offer or merely an invitation for you to come to the store to negotiate about the stole. The issue boils down to whether a reasonable person would believe the store intended to be bound upon your acceptance. Just as in Lucy v. Zehmer,¹⁴² the court looking at this issue should examine the totality of circumstances in making its decision. In Lefkowitz v. Great Minneapolis Surplus Store, Inc.,¹⁴³ the department store case, the court held that the advertisement did constitute an offer. A reasonable person would believe the store intended to be bound upon an acceptance because the advertisement was “clear, definite, and explicit, and [left] nothing open for negotiation.”¹⁴⁴

Often the circumstances suggest that an advertisement is not an offer. In fact, for many analysts, the very fact that a communication appears in a newspaper is strong evidence that the advertiser did not intend to be bound to any particular reader.¹⁴⁵ Courts prone to view advertisements only as invitations to negotiate, however, usually seize upon additional evidence that reenforces their view that the advertiser lacked an intention to be bound. For example, in Lefkowitz, the court failed to enforce as an offer another advertisement for fur coats that did not set forth their value because the value was “speculative.”¹⁴⁶ In Ford Motor Credit Co. v. Russell,¹⁴⁷ a car dealer advertised a Ford Escort for $7826. The advertisement set forth monthly payments of “159.29, based on a 60-month loan at 11% A.P.R.”¹⁴⁸ The court held that the advertisement was not an offer for financing at 11% because a reasonable person would understand that “not everyone qualifies for financing.”¹⁴⁹ An additional reason offered by the court, that reasonable people know that the dealer did “not have an unlimited number of Ford Escorts to sell,”¹⁵⁰ seems less persuasive. After all, a reasonable person reading the advertisement would understand that the offer (if there was one) stayed open only until the dealer ran out of Escorts.

Newspaper advertisements are not the only type of communication that call for offer analysis. Suppose two merchants write a series of letters back and forth (hard copy or electronic) and then one claims that the parties have made an enforceable agreement. As with advertisements, a court must determine whether one of the communications constitutes an offer (and another an acceptance—but we will study acceptance law shortly¹⁵¹). For example, a court declined to find an offer based on a communication from a seller that it “want[ed]” a certain amount for goods,¹⁵²and that it has “about 1800 bushels or thereabouts” of seed.¹⁵³ Neither communication exhibits the degree of definiteness required to satisfy a reasonable person that the seller intended to be bound upon an acceptance. On the other hand, suppose that a prospective purchaser sends a letter to the seller asking for the lowest price at which the seller is willing to sell certain jars. The seller responds with price quotations and with the admonition: “for immediate acceptance.” A court faced with these facts had no trouble finding that the seller’s communication was an offer even though the purchaser could decide, among other things, the quantity of each size jar and the precise delivery dates.¹⁵⁴

These decisions illustrate the importance of evaluating all of the surrounding circumstances (a student of mine once pointed out that “surrounding circumstances” is redundant, but lots of courts use the phrase), and that no one factor controls whether a party has made an offer. Still, some elements may be more equal than others. For example, a request for a firm offer by one party followed by “quotations” by the other, is powerful evidence that the latter is making an offer and a reasonable person would usually so believe.¹⁵⁵

Another factor of great importance is whether the supposed offer is too good to believe. For example, the opinion in Lucy v. Zehmer does not clearly reveal the fair market value of the farm Zehmer supposedly offered to Lucy. Recall that the purchase price was $50,000. Suppose the fair market value of the farm was $250,000. I trust the court would have found that a reasonable person would believe, and that Lucy actually believed, that the “agreement” was a joke. But, you say, what about the lapin stole in Lefkowitz that was “offered” for $1. The court didn’t treat this offer as a joke. Compare the two contexts. In Lucy, there was plenty of other evidence to suggest that Zehmer was joking. An offer that was too good to believe probably would have compelled the court to come out in favor of Zehmer. However, department stores often make offers of “loss leaders,” items they sell at a loss in order to attract people into their store. So an offer of a limited number of items for nominal consideration would not seem so unreasonable.

Outlandish propositions that recipients attempt to turn into offers are frequent items in newspapers or broadcast media. Here are some of my favorite examples: During the good old days of President Clinton and Monica Lewinsky, Geraldo Rivera promised $10,000 to anyone who could find a criminal prosecution of an individual for lying about a sexual matter. A criminal defense lawyer turned up several such cases and insisted that Geraldo had made an offer. NBC paid his claim.¹⁵⁶ In a television commercial, PepsiCo. promised to award a Harrier fighter jet worth $23 million to anyone who collected seven million “Pepsi Stuff” points off its packaging or through direct purchase.¹⁵⁷ The PepsiCo commercial is a good example of an “offer” that is too good (or too outrageous) to believe.¹⁵⁸ A rapper promised on YouTube to pay $1 million to anyone who recovered his stolen laptop. A jury found for the plaintiff who found the laptop.¹⁵⁹ One more example: A defense attorney who appeared on “Dateline” offered $1 million to anyone who could prove that it was possible to get to a motel five miles from the Atlanta airport in less than 30 minutes. It seems that the attorney’s client’s alibi for a murder depended on the theory that such a trip was impossible. After a young lawyer made the trip in 28 minutes and demanded the money, the defense attorney claimed the pronouncement was “just a joke” and threatened to sue the young lawyer for extortion. This is a hornbook and I’m supposed to give you the answers, but I can’t resist asking, “what do you think?”¹⁶⁰

b.Acceptance

According to the Restatement (Second) of Contracts, “[a]cceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.”¹⁶¹ The key word here again is “manifestation.” Consistent with the objective test of assent, contract law asks whether a reasonable person would believe the offeree intends to accept the offeror’s terms and form a contract, not whether the offeree actually intended to do so.¹⁶² An offeree can accept by spoken words or by conduct. For an example of the latter, suppose you purchase a car that includes a 90-day trial subscription to Sirius XM Satellite Radio. After the 90 days have elapsed, you receive a customer agreement from Sirius. You continue to use the radio without responding to Sirius. You may have accepted the agreement or at least the terms in it that are conspicuous.¹⁶³ So beware!

Acceptance issues often present themselves when an offeree authors a “wishy-washy” response to an offer and then one of the parties has second thoughts about contracting. Was the offeree’s communication an acceptance that formed a contract, so that neither party can renege? For example, suppose that you offer Alice your piano for $400. You tell her that you will deliver the piano “during the weekend,” and that the deal is “as is,” meaning without any warranties as to the quality of the piano. Let us assume your offer is “clear, definite, and explicit,”¹⁶⁴ and a reasonable person would believe you intended to be bound upon an acceptance by Alice. Suppose Alice responds with the following. “I will purchase the piano. I am concerned about the quality of the piano. Can you assure me it is first rate?”

The issue is whether a reasonable person would believe Alice “definitely” and “unequivocally” intended to be bound by the offer. The answer is likely no. Alice does not say she “accepts.” Further, the use of the phrase “I will purchase,” although indicative of a commitment to follow, appears to mean that she has not yet accepted. Further, she wants assurances about quality before she commits.

Real cases abound with similar issues. In one, for example, the offeree of real estate signed a purchase agreement for certain real estate, but his lawyer included a letter with the contract stating in part:

“My clients are concerned that the following items remain with the real estate: a) dining room set and tapestry wall covering in dining room; b) fireplace fixtures throughout; c) the sun parlor furniture. I would appreciate your confirming that these items are a part of the transaction, as they would be difficult to replace.”¹⁶⁵

The court held that despite the signed purchase agreement, the letter rendered the offeree’s entire communication a “qualified acceptance,” which, as a legal matter, is no acceptance at all.¹⁶⁶ The court found that “[t]he letter does not unequivocally state that even without the enumerated items [the offeree] is willing to complete the contract.”¹⁶⁷ The seller-offerors were therefore allowed to walk away from the deal.

Silence as an acceptance You send a written offer to sell your piano to Alice. Alice does not respond. Has she accepted? Contract law treats silence like any other response to an offer. In short, it applies the objective reasonable person test to determine whether a party has accepted.¹⁶⁸ Would a reasonable person believe Alice intended to accept your offer? Sorry, ordinarily silence suggests that a party doesn’t want to contract. Decisions often recite the principle that silence does not constitute an acceptance,¹⁶⁹ but in reality such language means that, in the usual case, a reasonable person would not believe the silent offeree intends to be bound.¹⁷⁰

You may be wondering at this point what are examples of situations where silence would constitute an acceptance. The Restatement (Second) of Contracts enumerates a few. For example, suppose one early spring day, you watch from a window as employees of Bob’s Lawn Mowing Service unload their lawnmowers from a truck and mow your lawn. Although you hadn’t responded to Bob’s formal offer to mow your lawn this year, you had used Bob’s for several years without formally accepting any arrangement. Your silence constitutes an acceptance because you had reason to know Bob’s expected payment and you took the benefit of the service with a reasonable opportunity to stop Bob’s.¹⁷¹

Suppose Alice had purchased many items of furniture from you in the past and had mentioned that she wanted your piano if you ever decided to sell it. She bumps into you again and reiterates her desire to buy your piano. She may have created a reasonable expectation that she would take the piano when you offer it for a fair price, especially if you do so soon after her statement. Alice therefore may have the duty to notify you if she does not want the piano.¹⁷²

Restatement (Second) section 69(2) states that an offeree is bound to an offer when she “does any act inconsistent with the offeror’s ownership of offered property.” This rule could present problems when a merchant sends unsolicited goods in the mail. You might receive a DVD of the movie “Zombie Island Massacre,” even though you didn’t order it or want it.

Nevertheless, curiosity causes you to open and play the movie. Have you accepted the DVD and do you have to pay for it? Federal law now declares the mailing of unordered goods to be “an unfair trade practice,” and allows you to keep the DVD as a gift.¹⁷³ (Some gift!)

3.The Offeror Has the Power to Prescribe the Terms of the Offer

An offeror does not have to make an offer. But if an offeror decides to make one, she can set forth any terms she likes, which the offeree must accept to form a contract.¹⁷⁴ For example, you don’t have to offer to sell your piano, you can keep it! (But if you play like me, you might want to sell.) If you do decide to make an offer to sell your piano, however, you are free to set any terms that you desire. You can set any price you want for the piano, and choose your delivery and warranty terms. If the price is outrageously high, of course, Alice doesn’t have to accept your offer and form a contract. She can make a counteroffer instead: “Your price for the piano of $1000 is too high. However, I offer to buy the piano for $400.”¹⁷⁵ Contract law treats a counteroffer the same as any offer by inquiring whether a reasonable person would believe Alice intends to contract upon your acceptance of the $400 selling price.¹⁷⁶ Of course, if you don’t want to sell for $400 you can refuse to accept the counteroffer. If Alice wants to be sure of getting the piano, she must comply with your terms.¹⁷⁷

An offeror can also prescribe terms concerning the manner in which an offeree must accept an offer.¹⁷⁸ Courts have wrestled with the problem of determining the difference between prescriptions in offers, terms that the offeree must follow in order to form a contract, and suggestions, terms in the offer that the offeree does not have to comply with in order to accept.¹⁷⁹ For example, in an e-mail message, you offer to sell your piano to an acquaintance, Alec, in another town. You would like to hear from Alec by September 12, but you are willing to wait longer. You might write, “I would like to hear from you by September 12.” This date is a suggestion and Alec can form a contract by sending you a message on September 13.¹⁸⁰ (But we will see later that your offer does not stay open forever.)¹⁸¹

On the other hand, if hearing by September 12 is very important to you, for example, because you have other prospective purchasers of the piano, you could write, “I must hear from you by receiving a return e-mail by 6 p.m., September 12.” If Alec tried to accept on September 13, it would be too late.

How does contract law sort out the difference between prescriptions and suggestions when the language of the offeror is ambiguous? Are you shocked to learn that the test is an objective one? Would a reasonable person believe the offeror required the offeree to follow a method of acceptance or only suggested that method.¹⁸² Resolving this issue requires examining all of the circumstances. In sale-of-goods cases, the UCC creates a presumption that any “reasonable” manner or medium of acceptance is satisfactory unless the offeror “unambiguously” indicates otherwise by the “language or circumstances.”¹⁸³ This rule places on the offeror the burden of proving that a reasonable person would believe that the offer contains a prescription as to the manner or medium of acceptance. Your requirement of receiving an e-mail by 6:00 p.m. on September 12, should satisfy the “unambiguously indicated” standard, so if Alice does not comply, you and she haven’t formed a contract.

4.Offers for Unilateral and Bilateral Contracts

Now you know that offerors can prescribe the manner required for acceptance of an offer. It follows, therefore, that they can require either a return promise as an acceptance or a return performance as an acceptance. (Recall too that a return promise or a performance can constitute consideration.¹⁸⁴) For example, if you offer to sell your piano to Alice for $400 if Alice promises to purchase it for $400, and Alice makes the promise, she has accepted your offer for what is called a bilateral (two-promise) contract. On the other hand, if you promise to sell your piano for $400 if Alice pays you $400, you have made an offer for a unilateral contract (one-promise, namely your promise) and the contract is formed when she pays you the money. When you make an offer for a unilateral contract, you have prescribed that the only way for Alice to accept is for her to pay you the money. Her promise to pay you would not be an acceptance and would not form a contract.¹⁸⁵

The language of unilateral and bilateral contract has fallen out of favor in the Restatement (Second) of Contracts, but the concepts remain the same: Offerors can require offerees “to accept by rendering a performance” or by a promise.¹⁸⁶ Despite the Restatement drafters’ conclusion that the terminology “unilateral and bilateral” contract was obsolete,¹⁸⁷ the terms are still helpful in encapsulating the concepts and you should not hesitate to use them. (If anybody criticizes you, please tell them to call me.)

One challenge with offers for unilateral and bilateral contracts (see, I’m using the terminology) is to determine which kind of offer an offeror has made. If the language of an offer is ambiguous so that a reasonable person cannot determine whether the offeror wants a promise or a performance as an acceptance, a court may presume that the offer was for a bilateral contract.¹⁸⁸ The Restatement (Second) of Contracts provides that an offeree can accept an ambiguous offer either by promising or performing.¹⁸⁹ An example of an ambiguous offer is where an uncle in a letter offers to leave his house to his niece “if she comes and takes care of him until his death.” In the same letter, however, the uncle writes, “please let me hear from you by the end of the month.” The first part of the uncle’s letter suggests the uncle sought a performance as acceptance, but the second suggests he wants her to promise to come and render care.¹⁹⁰ In the absence of ambiguity, however, contract law is clear: The offeree can accept only by following the offeror’s prescription. For example, if a reasonable person would believe the offeror required a return promise as an acceptance, the promisee can accept only by promising.

But now a slight catch: The offeree can still accept an offer for a bilateral contract by beginning performance if a reasonable person would believe that the offeree’s conduct in performing constitutes a promise to perform. For example, in one case a property owner wrote a builder that “[u]pon an agreement * * * you can commence at once” to improve the property owner’s offices.¹⁹¹ What kind of an offer is this? C’mon, you know—it is an offer for a bilateral contract because the property owner wants “an agreement” (thereby requiring a promise) before the builder starts. In the actual case, the builder began work by purchasing and working on lumber, but none of the work was earmarked for the particular job, nor was it performed at the site. The court held that this act was not an acceptance because it was “no indication to the other party of an acceptance.”¹⁹² The implication of the court’s reasoning, however, is that if the work did indicate an acceptance (suppose the builder started work at the property owner’s premises), the result would have been different.¹⁹³

5.Duration of Offers

The Restatement (Second) of Contracts sets forth several “offer-terminators.”¹⁹⁴ When an offer terminates, the offeree can no longer accept the offer because it no longer exists. Important offer terminators include a “rejection or counter-offer by the offeree,” a “lapse of time,” the offeror’s revocation, and the failure of the offeree to comply with any condition of acceptance.¹⁹⁵ We have already encountered the latter offer-terminator. We said that an offeror can prescribe the manner of acceptance.¹⁹⁶ If the offeree does not satisfy all of the conditions of acceptance, no contract is formed. Further, the offer is “off the table” (meaning that there is no offer that the offeree can accept) and the offeree cannot now comply with its terms.¹⁹⁷ Now let’s look at additional offer terminators.

a.Rejection or Counter-Offer

When a reasonable person would believe the offeree does not accept an offer, contract law treats the offeree’s decision as a rejection of the offer.¹⁹⁸ You offer to sell your piano to Alice for $400. She replies, “Pianos? We don’t need no stinking pianos.” We can say pretty confidently that a reasonable person would believe that Alice has rejected the piano.

A rejection terminates the offer. Alice cannot come back to you, even minutes later, and say that she accepts your offer. Her rejection terminates the offer.¹⁹⁹ This rule allows you to rely on her rejection and to look for opportunities to sell elsewhere.²⁰⁰ In a well-known case, two employees orally offered their resignations at a meeting with their employer, but their employer did not accept the resignations. A few days later, in what must have been a big surprise to the two employees, the employer sent a telegram to them stating that “we accept your kind offer of resignation effective immediately.”²⁰¹ The court held that the offers to resign were no longer open when the employer sent the telegram, so there was nothing to accept.²⁰²

We have already seen examples of counter-offers.²⁰³ You offer to sell your piano for $400. Alice replies, “that is too high, I’ll take the piano for $350 and no more.” Would a reasonable person believe Alice rejected your offer of $400? Most likely. (She could argue that she was trying to negotiate without rejecting the offer,²⁰⁴ but, judged objectively, her language is too strong, especially the use of the language “and no more.”) Would a reasonable person believe Alice intended to be bound to purchase for $350 upon your acceptance? Again the answer is yes. The legal ramification of the counter-offer is that your offer of $400 is off the table. If you do not accept $350, she cannot come back and accept your offer of $400.²⁰⁵ (She can make a new offer of her own for $400, which you can accept or reject.)

b.Lapse of Time

Offerors can prescribe the length of time their offers will stay open. If an offeror fails to specify an amount of time the offer will stay open, and the offeror claims that an acceptance came too late, contract law must fill the gap. Contract law’s general approach is to hold that an offer remains open for a “reasonable time”²⁰⁶ This means determining how long a reasonable person would believe the offer would stay open,²⁰⁷ which in turn depends on an analysis of all the circumstances.

Contract law holds, for example, that when the parties are engaged in a personal conversation, offers made during the conversation terminate at the end of it.²⁰⁸ If you offer Alice your piano for $400 during a conversation and she does not reply, she cannot call you up later and accept. You could have specified a time after which your offer would expire, but you did not. Contract law therefore fills the gap. A reasonable person would believe the offer made during your conversation would terminate at the end of the conversation, so Alice is out of luck. It is worth emphasizing that the conversation rule does not apply when other evidence suggests a different amount of time for your offer to stay open. Remember contract law’s quest here is to determine how long a reasonable person in the shoes of the offeree would think the offer will stay open. Suppose, for example, that you and Alice had bought and sold many items over the years, each of you making offers during conversations, and neither of you ever claiming that the offer expired at the end of a conversation. In fact, each of you had accepted many offers later over the telephone without incident. A reasonable person understanding this course of dealing probably would believe that your offer would stay open for at least a few days beyond the opening conversation.

The issue of duration of offers obviously comes up in a variety of contexts. For example, suppose Alice is injured in an automobile accident and the other driver’s insurance company offers to pay her $25,000 for her injuries. The insurance company makes the offer exactly one month before the statute of limitations (the time in which Alice can sue) would expire. Alice tries to accept the offer about five weeks later, over a week after the statute of limitations has run out. The insurance company refuses to pay anything, claiming that a reasonable time for accepting its offer expired when Alice could no longer sue its insured.²⁰⁹ At first blush the insurance company’s argument seems quite compelling. After all, why would a reasonable person believe the insurance company intended to hold its offer open after Alice could no longer sue its insured for the accident? However, a court that considered similar facts held that the running of the statute of limitations was “relevant,” but not conclusive in determining a reasonable time for acceptance.²¹⁰ A principal reason for the holding also presents a good lesson for aspiring lawyers. The court noted that the insurance company could have prescribed in its offer that the time for acceptance terminated when the statute of limitations expired, but the company failed to do so. The implication was that the failure of the insurance company to so specify meant that a reasonable person would believe that the offer would stay open beyond the running of the statute of limitations. The lesson for the lawyer: Advise your client to specify in its offer how long the offer will stay open!

c.Revocation

A revocation occurs when a reasonable person would believe the offeror has withdrawn the offer.²¹¹ A revocation becomes effective when the offeree receives the information that the offer is no longer open.²¹² One exception to this rule involves offers for unilateral contracts, such as a reward offer for capturing a criminal or finding a lost pet. Revocations are effective in such reward-offer cases when the offeror gives the revocation the same notoriety as the offer. For example, if the offeror makes an offer of a reward by publishing the offer in a newspaper, a revocation becomes effective as soon as the offeror publishes it in the same paper.²¹³ So, all you bounty hunters out there, be sure to check for revocations in the same medium that you saw the reward offer.

A revocation can come directly from the offeror in a conversation or in a written or electronic notice. For example, you tell Alice that you revoke your offer to sell your piano or you send a message to her to that effect. This withdraws the offer. A revocation can also consist of information the offeree receives that makes it clear to a reasonable person that the offeror cannot intend for the offer to remain open.²¹⁴ For example, suppose Alice finds out you have sold your piano to someone else. Such information constitutes an effective revocation of your offer to sell your piano to her. Once a court determines that there has been an effective revocation, and so long as the offeree receives the revocation before the offeree has accepted the offer, the revocation takes the offer off the table. We discuss the time when an acceptance of an offer becomes effective shortly.²¹⁵

d.Bars to Revocation—Option Contracts

Suppose on January 17 you say to Alice, “I offer to sell you my piano for $400 and I promise to keep the offer open until January 31.” On January 20, you tell Alice that you have changed your mind and that you are going to keep the piano. Or you tell her that you have sold the piano to someone else. Either notification constitutes an effective revocation under the principles discussed earlier.²¹⁶ (A reasonable person would believe you have withdrawn the offer.) But, what about your promise to keep the offer open? Recall the distinction between gift promises and bargained-for exchanges.²¹⁷ Your promise to keep the offer open was not supported by consideration—you didn’t extract something as the price of your promise. So your promise to keep the offer open is a gift promise and unenforceable.²¹⁸

Of course, we have seen (and will continue to see) instances in which technical contract law produces unhappy results, which, in turn, have inspired courts and lawmakers to develop counter-principles and exceptions. (Think, for example, of contract law’s treatment of the preexisting duty rule.²¹⁹) The rule allowing revocation of offers after assurances that they will stay open for a period of time is no exception. A series of exceptions mitigates the harshness of the rule by creating bars to revocation. First, consider the option contract exception. Suppose you promised to leave your offer open until January 31 in exchange for Alice paying you $10. You and Alice have entered a bargained-for exchange, called an option contract, and your promise to leave the offer open until January 31 is enforceable.²²⁰ This should not be controversial because the option contract is like any other enforceable contract. Note, of course, that the option contract is secondary to the principal proposed exchange, namely the sale of your piano. By paying the $10, Alice has purchased the right until January 31 to contemplate whether to purchase the piano.

How silly of me to say that option contracts are not controversial. You have studied enough law or read enough books about law or political science to know that all rules are controversial in some way. What if you asked for twenty-five cents instead of $10 to keep your offer open? Could you later claim that this was a “sham” (fake) consideration, mentioned only to get around the bargain requirement, and could you revoke your offer before January 31? Option contracts often arise in real estate transactions and courts have often considered the issue of “sham” consideration in this context. Generally, courts have not been receptive to your sham consideration argument, arguing that a fair price for an option is too difficult to ascertain and that courts are supposed to leave the adequacy of consideration to the parties anyway.²²¹ One suspects that the real reason courts enforce these suspect option contracts is because they believe the option mechanism supports real estate transactions (parties frequently utilize them)²²² and because courts don’t enjoy allowing an offeror to wiggle out of a promise to leave an offer open.

The Restatement (Second) of Contracts substantiates the position that option contracts do not require real consideration. Offers that are in writing and signed by the offeror are enforceable as option contracts if they propose a fair exchange “within a reasonable time” and “recite[ ] a purported consideration.”²²³ A purported consideration is fake consideration, such as twenty-five cents, which the offeror did not really bargain for. By requiring a writing and the reciting of fake consideration such as twenty-five cents, the Restatement approach theoretically satisfies the formal reasons for enforcing promises (evidentiary, cautionary, and channeling functions), discussed earlier.²²⁴ In light of the apparent importance of option contracts to business people, we have both formal and substantive reasons for enforcing them.

The Restatement (Second) also provides that option contracts are enforceable if “made irrevocable by statute.”²²⁵ An important statute governing option contracts for the sale of goods is Section 2–205 of the UCC. Section 2–205 enforces promises to leave offers open when made by a merchant (somebody who “deals in goods” that are the subject matter of the contract²²⁶), in writing, and signed by the offeror. Note that, unlike the Restatement approach, such offers do not have to recite any fake consideration. But the section limits the duration of a promise to leave an offer open to the time stated or three months (whichever is less) or, if the offer does not mention any time, for a reasonable time, not to exceed three months. So, a promise by a merchant in a signed writing to leave an offer open for two months is enforceable without consideration for two months. A promise by the merchant to leave an offer open for six months is enforceable without consideration for three months. A promise to leave an offer open forever would be enforceable for a reasonable time, up to three months.

e.Bars to Revocation—Beginning Performance of Unilateral Contracts

Contracts professors (at least ancient ones) love to play with this issue. So read with care. Suppose Alice offers to pay you $400 if you sell and deliver your piano to her. Notice that Alice has made an offer for a unilateral contract—she wants your sale and delivery of the piano, not a promise to sell it.²²⁷ Suppose you prepare the piano for delivery and, because she lives down a hill from you and the piano is on wheels, you push it out of your house and hop on while the piano rolls down the hill. (I once delivered a piano this way. Honest.) Suppose, however, that Alice yells out to you as you coast down the hill, “I revoke my offer.” She then claims that her revocation is effective because you had not accepted her offer, which required the actual delivery of the piano before you received her revocation.

OK, this is an unusual example, but it raises an important, fairly common issue. How should contract law treat a revocation of an offer after an offeree has begun, but not finished, performance of a unilateral contract? This issue arises in important settings. For example, an employer may create an employee benefits package in the form of an offer for a unilateral contract: “If you work for us for twenty years, you will earn a pension.”²²⁸ Does contract law protect the employee if the employer “revokes” the pension after 15 years? For another example, an offeror may promise compensation to a family member if the latter cares for the offeror during the offeror’s “golden” years and until death.²²⁹ What are the family member’s rights if the offeror revokes after the offeree has tendered years of care?²³⁰ (Remember, at the time of the revocation, the family member hasn’t accepted by caring for the offeror until his death.)

Although one analyst writing in the Yale Law Journal originally thought (he later reneged) that the offeror of a unilateral contract had the right to revoke without any liability even after the offeree has begun performance,²³¹ the modern view protects the offeree who is trying to perform. (See, don’t believe everything you read in the Yale Law Journal.) The first Restatement of Contracts achieved this purpose by binding the offeror on condition that the offeree complete or at least tender full performance.²³² (A tender is an “ ‘offer of performance * * * accompanied with manifested present ability to make it good.’ ”²³³) The second Restatement utilizes the option contract conception—once you begin to deliver the piano or tender it, you have created an option contract that binds Alice to allow you to complete performance.²³⁴ (Although a legal fiction, think of your beginning performance as consideration to support Alice’s promise to keep the offer open, like the $10 consideration discussed earlier that supported your promise to leave your offer open until January 31.²³⁵) As with the first Restatement, the second Restatement then creates a condition precedent to Alice’s liability, namely your “completion or tender of the invited performance.”²³⁶ It should also not be surprising to learn that an offeree who has begun performance of a unilateral contract must “exercise[ ] reasonable diligence” to notify the offeror if the offeror otherwise reasonably would not learn of the performance.²³⁷ More on this in a moment. In cases involving the sale of goods, without exception, the offeree must notify the offeror of beginning performance “within a reasonable time.”²³⁸

The policy behind creating fictitious option contracts when an offeree begins or tenders performance should not be hard to see. Contract law protects an offeree who relies on an offer when the only way to accept requires the offeree to begin performance.²³⁹ In fact, perhaps the option contract approach is not so fictitious after all. Isn’t Alice implying that if you rely on her offer and begin the shipment of the piano, she will give you a chance to finish? So as not to end a section with a rhetorical question, I’ll answer myself: “Yes!”

In addition, so as not to end a section with the implication that everything here is clear and straightforward, I’ll mention two additional issues. First, parties sometimes dispute whether an offeree has begun performance, and the answer is not always so clear. For example, suppose you offer to sell your piano to Alice if she pays you $400 first. Has Alice begun performance (so that you cannot revoke your offer) by taking the cash out of the bank, traveling to your house, and stating that she was there to pay for the piano? One leading case suggests that the answer is no.²⁴⁰ But a strong dissent, which I would argue is more persuasive, thought that similar actions did constitute performance of the offer for a unilateral contract.²⁴¹

Second, when must an offeree who begins performance notify the offeror? According to the second Restatement, the offeree does not have to notify the offeror at all unless the offeror asks for notification or the offeree “has reason to know” that the offeror will not otherwise learn of the performance “with reasonable promptness and certainty.”²⁴² In the latter case, the offeree must exercise “reasonable diligence” to notify the offeror unless the offeror actually learns of the offeree’s performance in a reasonable time or the offer stated that the offeree did not have to notify the offeror.²⁴³

f.Bars to Revocation—Offers for Bilateral Contracts

Suppose Alice offers to purchase your piano for $400 if you promise to deliver it. Quickly, what kind of offer did she make? Right, her offer is for a bilateral contract.²⁴⁴ You might think that an offer for a bilateral contract does not involve revocation issues pertaining to the reliance of the offeree, such as we have just seen with offers for unilateral contracts.²⁴⁵ After all, the offeree who receives an offer for a bilateral contract merely has to promise to perform. But if you think there are no revocation issues, you would be wrong.

Consider the great case of Drennan v. Star Paving Co.²⁴⁶ Drennan was a general contractor who made a bid to construct a school. In formulating his bid, Drennan relied on subcontractors’ bids for various portions of the job. Star Paving, one of the subcontractors, made a bid over the telephone to perform the paving work for Drennan for $7,131.60. Drennan asked Star Paving to repeat the bid, which it did. Star Paving’s bid was the lowest bid for the paving and Drennan incorporated it into his bid for the general contract. Drennan was awarded the general contract. The next morning, Drennan visited Star Paving’s office and introduced himself. Before Drennan could say anything else, Star Paving’s construction engineer told Drennan that Star Paving had made a mistake and could not perform the work for the amount it bid. Drennan then found another paving subcontractor who agreed to do the work for $10,948.60, and sought damages from Star Paving.

Was Star Paving’s bid enforceable? Remember, the bid basically constitutes an offer for a bilateral contract: “We promise to do the paving work, if you promise to pay us $7,131.60.” Although Drennan had used Star Paving’s bid in compiling its own bid for the general contract, Drennan had not yet accepted by promising to pay at the time Star Paving revoked its offer because of its claimed mistake.²⁴⁷ It looks like Drennan is in trouble!

The first few conclusions of the court seemed to substantiate that Drennan was in a fix. First, the court found that Star Paving had not promised to keep its bid open in exchange for Drennan’s use of the bid. In other words, the parties had not entered an option contract (with Drennan’s use of the bid as consideration for Star Paving’s promise to leave the bid offer open) because the evidence did not support the existence of such an intention on the part of the parties. Next, the court held that Drennan’s use of Star Paving’s bid was not an acceptance of Star Paving’s offer for a bilateral contract. A reasonable person would not believe that Drennan’s use of Star Paving’s bid showed that Drennan intended to be bound to Star Paving’s offer. (Apparently, the custom in the construction industry allowed a general contractor to replace a subcontractor after receiving the general contract, although the general contractor could not delay doing so too long.²⁴⁸) To accept Star Paving’s offer for a bilateral contract, Drennan would have had to promise to use Star Paving, which it did not do before Star Paving revoked during that fateful morning meeting between the parties.

Notwithstanding these findings, the court still held in favor of Drennan. The court focused on Drennan’s reliance on Star Paving’s bid. Calling the problem of revocation of offers for unilateral contracts an “analogous problem,” the court held that “it is only fair” to allow Drennan an opportunity to accept Star Paving’s bid when Star Paving had reason to understand that Drennan would rely on the bid and Drennan did rely on it.²⁴⁹ The court also invoked Restatement (Second) of Contracts, section 90, which enforces promises when the promisor should reasonably expect the promisee to rely on the promise. (We study section 90 in almost nauseating detail in Chapter 3.) Drennan and other decisions that follow its reasoning have thus created a new revocation bar, namely reasonable reliance on an offer for a bilateral contract.

The decision in Drennan causes me some concern. First, one can question the analogy to offers for unilateral contracts where, we have said, the only way to accept is by relying on the offeror to keep the offer open and by beginning performance. An offeree of a bilateral contract, on the other hand, can bind her offeror by promising to perform before relying on the contract. One can therefore argue that any reliance by Drennan before he accepts is at his own risk. Further, section 90 of the second Restatement applies only when a promisor should reasonably expect the promisee to rely. Why should an offeror of a bilateral contract reasonably expect an offeree to rely on the offer before acceptance?²⁵⁰ Suppose you offer to sell your piano to Alice for $400 and, before replying, Alice purchases expensive accessories for the piano. I doubt that you would reasonably have expected her to do this. After all, you and she had not formed a contract to sell the piano. (What are piano accessories anyway?)

In support of the court’s decision in Drennan, apparently general contractors customarily relied on subcontractors’ bids before accepting them, just as Drennan had done. Taking custom into account, Star Paving reasonably should have expected such reliance. I know of no such custom with piano accessories, however.

Finally, with respect to the Drennan case, I have always been suspicious of Drennan’s trip to Star Paving the day after Drennan was awarded the general contract. Why did he stop off there and not at some other subcontractor’s office or just go to his own place of work? Perhaps Drennan was himself suspicious that Star Paving had made a mistake. (The court stated, however, that Drennan “had no reason to know that defendant had made a mistake in submitting its bid since there was usually a variance of 160 per cent between the highest and lowest bids for paving in the desert * * *.”²⁵¹) We will see in Chapter 9 that such a suspicion (if he had it) would probably be sufficient to allow Star Paving relief from its bid.

6.Bargaining at a Distance

This subsection takes up an issue that soon may be of historical interest only. The issue concerns contract formation when the parties are separated by some distance and use the mail (or telegram) as their medium of communication. (Most students seem addicted to e-mail and the internet, so you should be able to guess why this issue may soon be obsolete.) Despite innovative ways of communicating and forming contracts, at least a brief look at the old stuff is still in order. This is because a major question facing lawmakers today is whether the traditional rules of contract formation ought to apply to the new technology. In order to understand this set of issues, we need to look at the traditional rules and then test them out in the new electronic environment.

a.Communication via the Mail or Telegram (The Old Stuff)

The main problem when parties communicate via the mail is that both parties cannot know at the same time whether they have formed a contract. The offeror doesn’t know when and if the offeree put a letter of acceptance in the mail until the offeror receives the letter. The offeree doesn’t know when and if the offeror received the acceptance until the offeror sends a confirmation. As an early case said, “[a]nd so it might go on ad infinitum.”²⁵² Who should contract law favor, the offeror or the offeree?

Of course, an offeror can prescribe in the offer that the offeror must receive an acceptance before a contract is formed, thereby assuring that the offeror is first to know when a contract is formed. Suppose, for example, on July 1 you send a letter to Alice in which you offer her your piano for $400. You specify that you must receive an acceptance by mail (and by no other medium) by July 20. We have learned that contract law will honor your prescriptions as to the time and manner of acceptance.²⁵³ Alice’s letter of acceptance that is posted on July 19 and arrives on July 21 is no good. (We have also seen that you can revoke your offer even before July 20 unless one of the bars to revocation apply.²⁵⁴ Gee, we’ve covered a lot already.)

Now suppose you fail to include any language in your July 1 offer with respect to the time or manner of acceptance. Contract law must determine who gains the advantage with respect to knowing when a contract is formed. For example, suppose on July 8, Alice posts a letter of acceptance to you, which you receive on July 11. Is the contract formed on July 8 or July 11? The date of formation is not important if both parties perform the deal without incident. But suppose you sent a letter to Alice on July 6 revoking your offer, which Alice received on July 9. Recall that revocations are not effective until the offeree receives them, here July 9.²⁵⁵ So, if Alice’s letter of acceptance forms a contract when posted on July 8, your revocation is no good. But if Alice’s letter of acceptance forms a contract when you receive it on July 11, the revocation Alice received on July 9 is effective and you are not bound.

After some debate in the courts, contract law has settled on the “acceptance-is-good-when-posted” rule, so Alice’s letter posted on July 8 forms the contract and your revocation is ineffective.²⁵⁶ You should have prescribed when the acceptance becomes effective, namely when you receive it. In fact, a fairly persuasive argument in favor of the acceptance-is-good-when-posted rule is that offerors can protect themselves from the uncertainty concerning when a contract has been made and offerees cannot. If an offeror fails to avail itself of that protection by prescribing a time of acceptance in the offer, then the law should favor the offeree.²⁵⁷

Courts have also offered other reasons for the acceptance-is-good-when-posted rule. One is that the offeror, by choosing to use the mail, has made the post office her agent. As soon as an offeree posts an acceptance, constructively it is in the hands of the offeror.²⁵⁸ Another explanation, at least for adhering to the rule, is that contract law requires certainty as to when contracts are formed and most courts have already settled on the acceptance-is-good-when-posted rule. Courts should not change this settled rule now.²⁵⁹

Regardless of the reasons for the acceptance-is-good-when-posted rule, its ramifications are clear. In the absence of a prescription in an offer otherwise, a posted acceptance forms a contract and neither party can change her mind. If Alice posts an acceptance before she receives a revocation of the offer, a contract is formed. If she posts her acceptance, but the postal service loses it, a contract is still formed. If she posts her acceptance but retrieves it from the post office (modern rules allow this), a contract is still formed.²⁶⁰

b.Electronic Offer and Acceptance

Electronic contracting raises lots of issues, but the most basic is whether the contract rules of agreement (the material of Part B of this chapter) should apply to this new medium in total, with some refinement, or not at all. Obviously, if the latter, electronic contracting would require a whole new set of rules. Although the digital revolution is upon us full force, I am still not aware of anyone asserting persuasively that contract law must start over in the field of electronic contracting. Basic principles, such as that contract law should enforce agreements supported by consideration, that contract law should use an objective “reasonable person” test to determine whether the parties have made an agreement, and that contract law should enforce the prescriptions in offers, seem to apply with equal strength to the electronic contracting medium. But some changes in contract law may be necessary to suit this new manner of contracting.

For example, in Chapter 6, we will investigate some problems of consumer standard-form contracting that the new medium exacerbates.²⁶¹ (We will see, for example, that internet sellers may take advantage of our impatience and our tendency to be “click happy” by including unfair terms in our standard-form agreements.) Here we focus on (1) whether the rules of bargaining at a distance heretofore applied to the mail and telegram should also apply to electronic contracting; and (2) how to deal with the introduction of what some call “smart contracts,” which some enthusiasts assert will eliminate the need for law and courts to support these contracts (a pretty dramatic boast, I would say).

Only a brief discussion seems necessary with respect to the bargaining-at-a-distance question. Specifically, should the “acceptance is good when posted” idea apply to online contracting so that sending an acceptance by e-mail or accepting by clicking on an “I accept” button on a website becomes effective when sent? Although the problem of a delay in communication is largely eliminated with electronic contracting, there will be occasional glitches. For example, a party may accept as above but the transmission may fail to go through. Is a contract formed at the time the offeree acts?

Note that, just as in a paper world, an offeror can protect herself by requiring actual receipt of the offeree’s e-mail or form before a contract is formed. If the offeror fails to do so, the equities lie with the offeree. The acceptance should therefore be effective when sent. In short, the same reasoning applies to both electronic and paper communications.

With respect to the second question, articles are now popping up explaining the “smart contract” revolution, but most of the articles (and smart contracts themselves) are quite technical and difficult to understand (at least for people like me, still struggling to use smart phone apps).²⁶² Here’s the best description I could find:

Smart contracts enable firms to transact without the need for law or courts. They can autonomously negotiate with other parties (or other parties’ smart contracts), and then attach directly to the parties’ information systems so that goods or payment promised by the contract are automatically delivered.²⁶³

Perhaps the following example will help.²⁶⁴ Suppose you lease cars to customers and can control remotely when the cars are operational. You and your lessee “have pre-specified a bargaining logic based on * * * desired terms. * * * [You run a] blockchain program that monitors [your] lessee’s accounts and inventory, analyzes [the lessee’s] proposed terms, and then autonomously negotiates terms acceptable to [you] both.”²⁶⁵ Lessee, not to be outdone, also runs a blockchain program that monitors the lessee’s funds to make sure lessee has enough money to pay for the lease. “Both applications are authorized to bargain and enter into a smart contract for their respective owners.”²⁶⁶ The deal goes through without the need for bargaining or negotiation. But suppose your lessee fails to pay on time. The smart contract can terminate operation of the car.

Some analysts make big claims about smart contracts and use words such as “revolutionize” and “fundamentally transform” when describing how firms will do business in a world of smart contracts.²⁶⁷ Perhaps smart contracts have the potential to increase the speed and accuracy of transactions and create less costly enforcement techniques.²⁶⁸ But a knowledgeable analyst on this subject worries about the loss of flexibility in bargaining and enforcing contracts, both important in many contracting environments.²⁶⁹

As this edition goes to press, it is too early to know the future of smart contracts. This modest discussion of the subject is only to alert you to the fact that changes in technology may have a big effect on methods of making agreements and the law that governs them.

7.Limitations of Agreement Law

I do not mean to alarm you when I report that some lawyers and contracts writers claim that most of what we have reviewed in Part B of this chapter is archaic and irrelevant. They do not base their claim so much on the inroads of electronic technology, but on their view that the actual processes of contracting are very different from the neat offer and acceptance scenarios often described in cases and textbooks (and here). For example, businesses often make preliminary agreements of many different kinds:

Especially when large deals are concluded among corporations and individuals of substance, the usual sequence of events is not that of offer and acceptance; on the contrary the businessmen who originally conduct the negotiations, often will consciously refrain from ever making a binding offer, realizing as they do that a large deal tends to be complex and that its terms have to be formulated by lawyers before it can be permitted to become a legally enforceable transaction. Thus the original negotiators will merely attempt to ascertain whether they see eye to eye concerning those aspects of the deal which seem to be most important from a business point of view. * * * When the lawyers take over, again there is no sequence of offer and acceptance, but rather a sequence of successive drafts. * * * After a number of drafts have been exchanged and discussed the lawyers may finally come up with a draft which meets the approval of all of them, and of their clients. It is only then that the parties will proceed to the actual formation of the contract, and often this will be done by way of a formal “closing” * * *.²⁷⁰

If deals between “corporations and individuals of substance” (I guess that excludes you and me) do not have an identifiable sequence of offer and acceptance, the traditional approach to agreement formation, namely looking for “the offer” and “the acceptance,” obviously will not be very helpful in this context. In such situations, contract law requires a different modus operandi.

Similarly, in sales of goods between businesses, the parties often utilize purchase orders and acknowledgment forms, but often fail to read the fine print on the forms. Sometimes the two forms do not match. For example, suppose a buyer’s purchase order includes a term requiring arbitration of disputes, but the seller’s acknowledgment form specifically calls for adjudication in a court. If a dispute develops and the seller sues the buyer for breach of contract in a court, the court must determine whether the parties made an enforceable contract (after all the acknowledgment form does not match the purchase order) and whether it should hear the dispute or require arbitration.

A third instance of contract formation where traditional rules of offer and acceptance are problematic involves what some people call “rolling contracts,” often between a business and a consumer. Suppose a consumer orders a computer over the telephone and pays by giving her credit card information. The seller sends the computer in a package that also contains all of the terms of the deal. Is a contract formed? What are its terms?

Before turning to contract law’s approach to these problems, I owe you a brief defense of traditional offer-and-acceptance analysis. After all, we just spent lots of time reviewing it. The law of offer and acceptance remains important because critics underestimate the number of contracts made via this traditional route. In addition, courts still employ offer-acceptance analysis even when this framework does not fit very well. In order to understand the analysis, we must be conversant with offer and acceptance law. Restatements, statutes, and international conventions also continue to pay lots of attention to offer and acceptance law. Finally, we will see that contract law’s response to instances where the exchange lacks a clear offer and acceptance still resembles the traditional approach.

a.The Legal Significance of Business Draft Agreements

Now let’s get to the substance of the problem. How should contract law determine when the parties become bound when the parties produce lots of drafts, turn things over to lawyers, and then sign papers at a closing? You might think that this is not a hard question: Contract formation must occur at the closing when the parties sign the final documents. However, sometimes the parties sign earlier drafts, denominated “agreement to agree,” “preliminary agreement,” “memorandum of intent,” or the like, and sometimes they intend these earlier drafts to have a legal effect. What result when the parties fail to reach a final agreement, but one party claims that a signed draft constitutes a legally enforceable contract?

For example, suppose that Ajax Piano Co. and Neighborhood Music Co. intend to combine forces and create one large music company. One of the many documents they sign is a “memorandum of intent,” that contains most of the details of the merger. The memorandum also states that the parties’ lawyers “will proceed as promptly as possible to prepare an agreement acceptable to Ajax and Neighborhood for the proposed combination of businesses.” Further, under the heading “conditions,” the memorandum states that the obligations of the parties shall be subject to the “preparation of the definitive agreement for the proposed combination in form and content satisfactory to both parties and their respective counsel.” The parties also issue a press release stating that they had “agreed to cooperate in an enterprise that will serve the music industry.” Soon after publication of the press release, Neighborhood decides not to proceed with the merger. Does Ajax have any legal rights?²⁷¹

Ajax’s rights depend on how contract law treats the memorandum of intent. There are at least three possibilities. First, contract law could find that the memorandum is not legally enforceable at all.²⁷² The parties simply meant to memorialize their tentative oral understandings in a writing so that they can refer to them later. At the other extreme, contract law could find that the memorandum is a legally enforceable contract.²⁷³ The parties sought to bind themselves while they complete the remaining terms and refine the agreement. In the middle, contract law could find that the memorandum constitutes a legal obligation to make a reasonable effort to conclude the deal.²⁷⁴ The parties have come far enough to expect that their counterpart will not simply change its mind without a good business reason related to the particular deal.

You should not be surprised to learn that contract law sorts out these alternatives by determining which category the parties intended. Also not surprising, contract law determines the parties’ intentions objectively under the reasonable person test.²⁷⁵ Would a reasonable person believe that Ajax and Neighborhood intended not to be bound by their memorandum of intent, intended to be bound to an enforceable contract, or intended to be bound to use best efforts to complete the final deal?

Contract law determines what a reasonable person would believe no differently here than in other contexts. For example, recall the court’s approach in Lucy v. Zehmer.²⁷⁶ The court examined all of the circumstances to determine whether a reasonable person would believe Zehmer intended to contract. As with that inquiry, in cases such as the Ajax—Neighborhood merger, courts investigate, the language of the writing, the degree of detail, the importance of the subject matter, statements and conduct of the parties both inside and outside the formal negotiations, and any other relevant contextual matters.²⁷⁷

What does this portend for Ajax and Neighborhood? Their memorandum of intent uses language of commitment: The lawyers “will proceed as promptly as possible to prepare an agreement * * *.” Further, the memorandum already includes most of the terms. The parties also issued a press release stating that they had “agreed to cooperate.” On the other hand, the parties clearly contemplated that they would enter a later, final agreement and would “condition” enforcement of the final agreement on their satisfaction with it. In such situations, courts often decide that the parties intended to bind themselves to make a reasonable or good faith effort to conclude their deal.²⁷⁸ A reasonable effort requires more than simply changing one’s mind about entering the contract for reasons independent of the terms of the final draft.²⁷⁹

b.The Requirement of Certainty in Business Agreements

A party such as Neighborhood, that is contesting the enforcement of a draft agreement, has another defense. Even if the parties intended their preliminary draft to have legal effect, the draft may not be enforceable if the draft omits too many important terms.²⁸⁰ Courts in such situations decline to enforce the contract on the grounds of uncertainty. Even if the parties intended to contract, a court may reason that it would not know what to enforce.²⁸¹ Although the doctrine of uncertainty applies to all kinds of contracts, it is especially prevalent with regard to business agreements.

Suppose, for example, that a renewal clause in a lease states that “the Tenant may renew this lease for an additional period of five years at annual rentals to be agreed upon.” A court may decline to enforce this agreement-to-agree on the ground that the contract fails to inform the court of any basis for determining the renewal rate.²⁸² On the other hand, if the contract called for a renewal rate at market value or some percentage above the existing rent, a court would not hesitate to enforce the lease.²⁸³

Despite some decisions to the contrary,²⁸⁴ courts should make every effort to fill gaps and enforce agreements when the parties intended to contract. Recall that in Wood v. Lucy, Lady Duff-Gordon,²⁸⁵ Judge Cardozo found that, although Wood had not expressly promised to market Lucy’s designs, the evidence showed that he had agreed to make reasonable efforts to do so. We can apply this lesson to the lease-renewal problem. If the parties were serious about granting the tenant an option to renew, the court should enforce the obligation. The court could find that the parties impliedly agreed to a reasonable renewal rate based, for example, on the market value of the leasehold. Some decisions reflect this line of reasoning.²⁸⁶ In addition, Article 2 of the UCC relaxes the uncertainty test. Section 2–204(3) states that “[e]ven though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.”²⁸⁷

c.Form Contracts Between Sellers and Buyers of Goods

Let’s investigate further the example above involving a buyer’s purchase order of goods and a seller’s acknowledgment form that contradict each other and let’s fill out the facts. Although there are lots of variations, here is a typical (although simplified) case: The buyer, Ajax Piano Co., wants to purchase certain lumber for manufacturing pianos from Seaman’s Lumber Co. Ajax’s manager telephones Seaman’s selling agent and orders the lumber. The parties do not discuss the details (beyond price and delivery date) because they contemplate the exchange of a purchase order and acknowledgment form. Ajax then fills out and mails one of its purchase order forms, prepared by its lawyers and loaded with terms favorable to Ajax. The purchase order includes a term requiring arbitration of disputes. Before Seaman’s receives the purchase order, it sends its acknowledgment form (prepared by its lawyers and full of provisions favorable to Seaman’s) to Ajax, so the two forms cross in the mail. Seaman’s form calls for adjudication of disputes in a court. After each party receives the other’s form, Seaman’s delivers and Ajax pays the first installment of the purchase price of the lumber. Ajax is not satisfied with the lumber and, after some unsatisfactory discussions with Seaman’s, Ajax refuses to pay the next installment. Seaman’s sues Ajax in a court. The court must determine whether the parties formed a contract, and if so, whether the contract requires arbitration.

Obviously this is a tough case for anyone trying to resolve it by using basic offer and acceptance rules. The parties likely did not form a contract during their telephone conversation because they contemplated an exchange of forms and because business people understand that a writing is required to close a contract for the sale of goods of $500 or more.²⁸⁸ If the parties are not bound by the telephone call, Ajax’s purchase order probably constitutes an offer under the “reasonable person” test of offer-acceptance law.²⁸⁹ If so, Seaman’s acknowledgment form must be a counteroffer, since it is not a “mirror image” of the offer but, instead, includes provisions that contradict the offer, such as the requirement that the parties adjudicate disputes in court. Ajax’s acceptance of the lumber, then, must constitute an acceptance of Seaman’s counteroffer. A contract is thus formed on Seaman’s terms and the arbitration provision in Ajax’s purchase order drops out.

The problem with this analysis, of course, is that the parties have not read their forms at all, so to speak of an agreement between the parties to decide disputes in court, not through arbitration, is pure fiction. In addition, the offer and acceptance analysis arbitrarily favors the party who sends its form last. In defense of this approach, one can argue that each party should read their forms so that Ajax should be on notice of Seaman’s terms and Ajax should not accept the lumber unless it is willing to accept Seaman’s terms. Most courts and analysts, however, assume that business parties simply do not read the forms regardless of the legal incentives.²⁹⁰ If true, perhaps it is unwise arbitrarily to favor the party who has the “last shot” at denominating the terms.

The drafters of UCC section 2–207 saw the problems with traditional offer and acceptance analysis of the “battle of the forms” and sought to draft a solution.²⁹¹ Unfortunately, the UCC approach has not been successful. It is itself complex, controversial, and the subject of lots of litigation. Amendments have been suggested, but so far unsuccessfully (we will briefly look at the proposed amendments below²⁹²). Fortunately, we need only cover the basics of section 2–207 here because the section is an important subject in most upperclass commercial law courses. (But if your school covers the section exclusively in contracts and you find what follows too basic, you can get more than you bargained for on 2–207 in 1 James J. White, Robert S. Summers, and Robert A. Hillman, Uniform Commercial Code, 77–115 (6th ed. 2012)).

Section 2–207 is important enough to quote in full:

Additional Terms in Acceptance or Confirmation

(1)A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2)The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a)the offer expressly limits acceptance to the terms of the offer;

(b)they materially alter it; or

(c)notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3)Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.²⁹³

First, note that the section applies both to situations where a writing constitutes a confirmation of a deal already made, and to situations such as ours, where the purchase order constitutes an offer and the acknowledgment form constitutes a “definite and seasonable expression of acceptance.”²⁹⁴ Professors White and Summers (and I) point out that section 2–207 contemplates three contract-forming avenues in offer-acceptance situations such as the Ajax-Seaman’s contract.²⁹⁵ We will now analyze each of these routes.

Route 1 Route 1 consists of subsection 1 up to the comma, which language abrogates the common-law mirror-image rule (“operates as an acceptance even though it states terms additional to or different”). Route 1 also consists of subsection 2 of section 2–207, which explains what happens to the “additional terms” in the acceptance.

Here is one important source of confusion in section 2–207: Note that subsection 2 speaks only of “additional terms” and says nothing about what happens to “different terms.” Most interpreters of section 2–207 understand the difference between “additional” and “different” terms in the following way: Because Ajax’s form called for arbitration and Seaman’s form provided for court adjudication, Seaman’s form contains a “different” term. On the other hand, if Ajax’s form did not address the forum for resolving disputes and Seaman’s called for arbitration, Seaman’s term would be “additional.”²⁹⁶

At any rate, what is the significance of subsection 2’s reference to “additional” terms and not “different” terms? Among the possibilities, the drafters could have meant “additional” in subsection 2 to refer to both “additional or different” terms in subsection 1.²⁹⁷ Alternatively, perhaps they intended subsection 2 to apply only to “additional” terms. If the latter, section 2–207 gives no guidance on what happens to “different” terms. Some commentators and courts believe that “different” terms knock each other out of the contract, with the court to fill the gap.²⁹⁸ Applied to the Ajax-Seaman’s problem, this approach would mean that the arbitration provision and court-adjudication term knock each other out of the contract. Court adjudication would then be the mode of dispute settlement, not because Seaman’s form called for it, but because court adjudication is the form of dispute resolution that applies when the contracting parties have left a gap with respect to the issue. Contracts lawyers use the name “default rules” to refer to sources of law that apply when the parties have not drafted a rule for themselves. The default rule with respect to the forum for resolving contracts disputes is the courts.

If subsection 2 applies to both “additional or different” terms, the following analysis applies: The first sentence of subsection 2 says that Seaman’s court-adjudication term is a “proposal[ ] for addition to the contract.” The next sentence, containing provisions (a) through (c), applies only if the parties are “merchants.”²⁹⁹ Merchants, under Article 2 of the UCC, include people “who deal in goods of the kind * * *.”³⁰⁰ Here, Ajax and Seaman’s “deal” in lumber because Seaman’s sells it and Ajax builds pianos with it, so they are both merchants and the second sentence of subsection 2, with provisions (a) through (c), applies.

Before applying subsections 2(a) through 2(c), let’s see what would happen if the parties were not merchants. In that case, only the first sentence of subsection 2 would apply and we would have to determine what happens to “proposals for addition to the contract” if the parties go through with their deal.³⁰¹ Again, section 2–207 leaves us hanging. One can argue that if Seaman’s court-adjudication term is only a proposal (and not a counteroffer), it would drop out if not expressly accepted by Ajax. The parties would have to arbitrate their dispute.

Because the parties are merchants, subsections (2)(a) through (2)(c) apply. Subsection (2)(a) provides that Seaman’s court-adjudication term does not become part of the contract if Ajax’s offer “expressly limits acceptance” to Ajax’s terms. Assume that no such language appeared in Ajax’s form. Subsection (2)(b) provides that Seaman’s court-adjudication term does not become part of the contract if it “materially alter[s]” the offer. As you may imagine, (2)(b) has generated lots of litigation because of the fuzziness of precisely what constitutes a material alteration. Official comments 4 and 5 to the section list some examples,³⁰² but, according to many courts the materiality issue boils down to the question of whether a term causes “hardship as a result of surprise.”³⁰³ Applied here, the test leads to the question of whether a term that changes the manner in which disputes are settled is surprising, causes hardship, and therefore is a material alteration (I would think so.) If so, Seaman’s term drops out of the contract under (2)(b). The term would also drop out under subsection (2)(c) if Ajax had already notified Seaman’s or notified it within a reasonable time after receiving the court-adjudication term that Ajax objected to it. Apparently, the drafters did not contemplate that Ajax’s arbitration term in its purchase order would constitute notification to Seaman’s that Ajax objects to court adjudication. Ajax must state this intention explicitly.

Note that the result of the Ajax-Seaman’s dispute under section 2–207, route 1, is the exact opposite of the result under common-law offer and acceptance rules: Ajax gets arbitration. The party that sent its form first prevails. As with common law, however, there is no particularly compelling explanation for why the law should favor the first party when neither party reads their forms.

Route 2 Contract formation under route 2 consists of subsection 1 after the comma: “unless acceptance is expressly made conditional on assent to the additional or different terms.” With this language, the drafters embraced the idea that a party such as Seaman’s has the power to make a counteroffer. But it is not enough for a party to simply include an “additional or different” term (as here) for the communication to constitute a counteroffer. According to case law, Seaman’s form would have to track the language of the statute, including something like “acceptance expressly conditional on Ajax agreeing to judicial resolution of disputes.”³⁰⁴

If route 2 applies to Ajax and Seaman’s, Ajax’s acceptance of the goods and payment would constitute an acceptance of Seaman’s counteroffer and Seaman’s court-adjudication term would prevail. This, of course, is the common-law outcome.³⁰⁵

Route 3 Section 2–207(3) provides the third route of contract formation. Most commentators conclude that the section applies when the parties’ forms hopelessly conflict and obviously do not establish an intention to be bound, yet the parties act as if they have a contract, such as by delivering and paying for the goods.³⁰⁶ One challenge, of course, is determining precisely when the writings conflict so much that route 3 applies. For example, one can argue that section 2–207(3) should govern the Ajax-Seaman’s transaction, not section 2–207(1) and (2). Recall that each party’s form heavily favors its drafter and several additional conflicts therefore likely exist. Further, the forms crossed in the mail so one can take issue with the conclusion that Seaman’s acknowledgment form constituted “a definite and seasonable expression of acceptance” under route 1. Of course, the lack of clarity even as to which route to follow does not add to the general luster of section 2–207.

If subsection (3) does apply, it specifies the governing terms. Specifically, the contract consists of the matching terms in the two forms and, to fill remaining gaps, terms supplied by other provisions of Article 2. (Article 2 contains gap-filler provisions, for example, with respect to the price of goods, the place of delivery, and the time for delivery.³⁰⁷) Ajax would not be entitled to arbitration because the parties did not agree to arbitrate and Article 2 does not supply a term that requires arbitration of disputes.

Amended section 2–207 You are not alone if you read through the previous explanation of section 2–207 and exclaimed, “what a mess” (not my explanation, section 2–207 itself). As you know, ALI and NCCUSL proposed amending Article 2 for possible adoption by the state legislatures (but to no avail).³⁰⁸ These bodies spent considerable time trying to resolve some of the ambiguities of section 2–207. Their ideas are worth perusing.

The amendment largely follows route 3 (subsection 3) of existing section 2–207:

* * * If (i) conduct by both parties recognizes the existence of a contract although their records do not otherwise establish a contract, (ii) a contract is formed by an offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record that contains terms additional to or different from those in the contract being confirmed, the terms of the contract, subject to Section 2–202, are:

(a)terms that appear in the records of both parties;

(b)terms, whether in a record or not, to which both parties agree; and

(c)terms supplied or incorporated under any provision of this Act.

A “record” under the Article 2 amendments includes both written and electronic agreements.³⁰⁹ Section 2–202 refers to the parol evidence rule, which we take up in Chapter 7 (and can ignore for now).³¹⁰

Under amended section 2–207, the Ajax-Seaman’s exchange would constitute either a contract recognized by the parties, but not by their records under (i), or a contract formed by offer and acceptance under (ii). (This parallels contract formation under routes 3 and 1 respectively under existing section 2–207.) Either way, subsections (a) through (c) establish the terms. Ajax’s arbitration provision was not in each record under (a), and the parties did not agree to arbitrate outside of their records under (b). Subsection (c) therefore applies and Article 2 would supply the gap filler on dispute resolution. As with existing section 2–207, Ajax would not be entitled to arbitration because the parties did not agree to it and Article 2 does not supply a term that requires arbitration of disputes.

Amended section 2–207 would improve analysis of the “battle of the forms” because it is simpler. Still, courts would have to wrestle with new ambiguities, such as how to prove whether parties “agree” to terms outside of their records. Suppose, for example, that Ajax’s form was silent on dispute resolution and Seaman’s included an arbitration provision. Did Ajax agree to arbitration by taking and paying for the goods? Nevertheless, the American Law Institute’s new Principles of the Law of Software Contracts models its battle-of-the-forms provision on amended section 2–207.³¹¹

Despite the discussion above, perhaps we don’t have to worry too much longer about “the battle of the forms” (but do worry about it for your exam). Although Section 2–207 is still producing lots of cases, changes in technology may alter the way companies do business. If these entities increasingly do business online subject to their posted terms, the battle of the forms may become a subject of only historical value.³¹²

d.Rolling Contracts

The final example of a situation in which offer-acceptance analysis is problematic involves “rolling contracts.” In rolling contracts, consumers order and pay for goods before having an opportunity to read most of the terms, which are contained on or in the goods’ packaging.³¹³ The terms of “rolling contracts” thus just keep rolling along as the deal progresses.

Consider the leading case of Hill v. Gateway 2000.³¹⁴ The Hills ordered a computer from Gateway over the telephone and gave their credit card information to the salesperson. Soon thereafter, Gateway delivered the computer in a box that contained Gateway’s standard form, including a declaration that the terms would govern the transaction unless the Hills returned the computer in 30 days.³¹⁵ After using the computer for more than 30 days, the Hills experienced problems with its performance, and sued Gateway in federal court. A term in the standard form required arbitration of disputes.

The court found that Gateway’s shipment of the computer with the terms, including the 30-day-return right, constituted an offer. The Hills accepted the offer, according to the court, by keeping the computer for more than 30 days. The contract, which was formed at the end of the 30 day period, therefore included the arbitration provision along with Gateway’s other terms.³¹⁶

So far this looks like an ordinary offer and acceptance case, at least according to the court. However, the Hills maintained that the acts of paying for the computer and of Gateway’s shipping it constituted an offer and acceptance thereby forming a contract. Further, because nothing in UCC section 2–207(2) limits it applicability to merchants or to “battle of the forms” situations, the “additional” terms that followed contract formation, including the arbitration provision, drop out as proposals that the Hills did not accept.³¹⁷

The court did not accept the Hills’ argument in part because it found that Gateway conditioned contract formation on the Hills’ examination of the goods and the terms, something they could not do until long after the telephone order and payment. The court neglected to apply section 2–206(1)(b) of the UCC, which provides:

Unless otherwise unambiguously indicated by the language or the circumstances * * * an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods * * *.³¹⁸

According to section 2–206(1)(b), the Hills version of offer and acceptance was correct unless the language of the contract or the circumstances showed “unambiguously” that contract formation was postponed until 30 days after delivery of the computer to the Hills. But the truth is that the parties likely gave little thought to the legal question of when their contract was formed. Rather, the parties were concerned with the procedure for ordering, delivering, and returning the computer, and when the Hills would receive the terms. Thus, section 2–206(1)(b) appears to favor the Hills’ version of the facts.

Perhaps a better approach to “rolling contracts,” would be to focus less on offer and acceptance, which does not appear to produce very definitive results on when a contract is formed, and more on the fairness of the terms that come in the box. Courts should strike unconscionable terms, a category of terms that we will discuss fully in Chapter 6 (where we again take up Hill v. Gateway).³¹⁹ For now, understand that the crux of the matter is whether the manner of revealing the terms or what they say is fundamentally unfair. Because “terms in the box” are common, cost efficient, and similar to travel tickets, insurance agreements, and countless other terms-after-payment transactions, courts have not found this method of doing business unfair. In Brower v. Gateway 2000,³²⁰ however, the court found Gateway’s arbitration provision unconscionable, not because of Gateway’s method of supplying the terms, but because it required the purchaser to incur “excessive costs” to arbitrate its dispute.³²¹

¹For the definitions of promise and bargain, see Restatement (Second) of Contracts § 2(1) (1981) (“A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.”) and § 3 (“A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.”).

²See Restatement (First) of Contracts § 75 (1932) (consideration is something “bargained for and given in exchange for the promise.”).

³Maughs v. Porter, 161 S.E. 242, 243 (Va. 1931) (“A gift is a contract without consideration, and, to be valid, must be executed * * *. Delivery of possession of the thing given or of the means of obtaining it so as to make the disposal of it irrevocable, is indispensable to a valid gift.”).

⁴See Restatement (Second) of Contracts § 71(2) (“A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.”); see also In re LinkedIn User Privacy Litig., 2013 WL 844291 (N.D. Cal. 2013) (members purchase of an upgrade is not consideration for a level of security already offered for free).

⁵This example was inspired by a similar problem posed by Williston in 1 Samuel Williston, The Law of Contracts 232–33 (1924), quoted in Maughs v. Porter, 161 S.E. 242, 243 (Va. 1931).

⁶See Williston, supra note 5, at 232–33; see also Plowman v. Indian Ref. Co., 20 F. Supp. 1, 5 (E.D. Ill. 1937) (requirement that retired employees come to employer’s office to pick up their checks merely a condition necessary to receive a gift).

⁷159 N.E. 173 (N.Y. 1927).

⁸Id. at 174.

⁹Id. at 176.

¹⁰Id. at 177.

¹¹125 N.E. 94 (N.Y. 1919).

¹²Id. at 94–95.

¹³See Williston, supra note 5, at 232; see also Restatement (Second) of Contracts § 81, cmt. a: “[T]he promisor must manifest an intention to induce the performance or return promise and to be induced by it, and * * * the promisee must manifest an intention to induce the making of the promise and to be induced by it.” (Emphasis added).

¹⁴See Allegheny Coll. v. National Chautauqua County Bank of Jamestown, 159 N.E. 173 (N.Y. 1927).

¹⁵Restatement (Second) of Contracts § 81(1).

¹⁶See Baehr v. Penn-O-Tex Oil Corp., 104 N.W.2d 661 (Minn. 1960); Carlisle v. T & R Excavating, Inc., 704 N.E.2d 39, 43 (Ohio Ct. App. 1997) (“Something is bargained for if it is sought by the promisor in exchange for his promise and is given by the promise in exchange for that promise.”).

¹⁷See Restatement (Second) of Contracts § 71(1).

¹⁸See Restatement (Second) of Contracts § 71(1) & (2).

¹⁹See id. § 71(3).

²⁰See Hamer v. Sidway, 27 N.E. 256, 257 (N.Y. 1891) (finding that a promisee who “restricted his lawful freedom of action” gave good consideration to support a promise); Restatement (Second) of Contracts § 71, cmt. d, illus. 9; see also Fritz v. Fritz, 767 N.W.2d 420 (Iowa Ct. App. 2009) (promise to refrain from abusing alcohol part of consideration) (citing Hamer v. Sidway, 124 N.Y. 538, 27 N.E. 256, 257 (N.Y. 1891)).

²¹See, e.g., Hardesty v. Smith, 3 Ind. 39, 39 (1851) (“The doing of an act by one at the request of another, which may be a detriment or inconvenience, however slight, to the party doing it * * * is a legal consideration for a promise by such requesting party.”).

²²27 N.E. 256 (N.Y. 1891).

²³Id. at 257.

²⁴Id. (quoting Frederick Pollock, Principles of Contract 167 (2d ed. 1885)).

²⁵Id.

²⁶See Allegheny Coll. v. National Chautauqua County Bank of Jamestown, 159 N.E. 173, 174 (N.Y. 1927) (Cardozo, J.) (“The promise and the consideration must purport to be the motive each for the other * * *.”); Grant Gilmore, The Death of Contract 111 n.34 (1974) (“Hamer v. Sidway * * * rejected the so-called bargain theory of consideration.”).

²⁷See infra notes 44–45, and accompanying text.

²⁸Maughs v. Porter, 161 S.E. 242, 243 (Va. 1931) (quoting Williston, supra note 5, at 233).

²⁹See Springstead v. Nees, 109 N.Y.S. 148 (App. Div. 1908) (discussing the grounds for enforcing promises in exchange for forebearing to bring a legal action); see also In re 114 Tenth Ave. Assoc., Inc., 441 B.R. 416, 427 (S.D.N.Y. 2010) (“forbearance from pursuing [claim] constituted adequate consideration”).

³⁰2 Arthur L. Corbin, Corbin on Contracts 420–24 (3d ed. 1995); see also Jinsoo Kim v. Son, 2009 WL 597232, *2 (Cal. Ct. App. 2009) (“Kim’s forbearance in filing a meritless lawsuit cannot supply adequate consideration for Son’s gratuitous promise.”).

³¹See Springstead, 109 N.Y.S. 148.

³²Restatement (Second) of Contracts § 74(1).

³³41 Colum. L. Rev. 799 (1941).

³⁴Id. at 800.

³⁵Id.

³⁶Id. at 816–17 (“[T]he fact that the transaction is an exchange and not a gift * * * does offer some guaranty so far as the cautionary and channeling functions of form are concerned.”).

³⁷125 N.E. 94 (N.Y. 1919). See supra notes 11–12, and accompanying text.

³⁸125 N.E. at 94.

³⁹See Fuller, supra note 33, at 815 (“As to the channeling function * * * the [gift] promise is made in a field where intention is not naturally canalized. There is nothing * * * to effect a neat division between tentative and exploratory expressions of intention, on the one hand, and legally effective transactions, on the other.”).

⁴⁰Id.

⁴¹Id. at 799–800 (substantive bases of contract liability relate to “the significance of the promise made and not merely the circumstances surrounding the making of it”); see also id. at 806–14.

⁴²Id. at 806–08.

⁴³Id. at 815–16.

⁴⁴Id. at 815 (quoting Bufnoir, Propriété et Contrat 487 (2d ed. 1924)).

⁴⁵Id. at 815.

⁴⁶See, e.g., Charles Fried, Contract as Promise: A Theory of Contractual Obligation (Harvard University Press 1981); Melvin Aron Eisenberg, Donative Promises, 47 U. Chi. L. Rev. 1 (1979); Charles Goetz & Robert E. Scott, Enforcing Promises, An Examination of the Basis of Contract, 89 Yale L.J. 1261 (1980); Richard A. Posner, Gratuitous Promises in Economics and Law, 6 J. Legal Stud. 411 (1977); see also Hanoch Dagan & Michael Heller, The Choice Theory of Contracts (Cambridge University Press 2017).

⁴⁷Melvin Aron Eisenberg, The World of Contract and the World of Gift, 85 Cal. L. Rev. 821, 849 (1997).

⁴⁸Id.

⁴⁹See, e.g., Memorylink Corp. v. Motorola Solutions, Inc., 773 F.3d 1266 (Fed. Cir. 2014) (no inquiry into adequacy of consideration); Pope v. Savings Bank of Puget Sound, 850 F.2d 1345, 1356 (9th Cir. 1988) (referring to this principle as “the first lesson in contracts”); Kazan v. Dough Boys, Inc., 201 P.3d 508, 513–14 (Alaska 2009) (“[W]e generally do not examine the adequacy of the consideration agreed upon by the contracting parties and instead leave the bargaining to them * * *. ”).

⁵⁰Hardesty v. Smith, 3 Ind. 39, 39 (1851); see also Haigh v. Brooks, 113 Eng. Rep. 119 (Q.B. 1839) (surrendering a worthless paper constituted consideration for a guarantee), aff’d, 113 Eng. Rep. 124 (Ex. 1840).

⁵¹Restatement (Second) of Contracts § 79(b); see also Dixon v. Dixon, 608 S.E.2d 849, 852–53 (S.C. 2005) (finding that “five dollars and other love and consideration” was adequate consideration for a house because “[w]hen deciding whether there has been a failure of consideration, this Court has held that ‘the slightest consideration is sufficient to support the most onerous obligation’ ” (quoting First Nat’l Bank of S.C. v. Wade, 141 S.E.2d 102, 104 (1965))).

⁵²See infra Chapter 6.

⁵³Restatement (Second) of Contracts § 79(b).

⁵⁴See supra notes 17–18, and accompanying text.

⁵⁵See Restatement (First) of Contracts § 75(1)(d); see also In re Central Ill. Energy Coop., 526 B.R. 786, 794 (Bankr. 2015) (“It is black letter law that mutual and concurrent promises provide sufficient legal consideration to support each other.”).

⁵⁶See, e.g., Princeton Homes, Inc. v. Virone, 612 F.3d 1324, 1332 (11th Cir. 2010) (“Princeton’s obligation to complete construction within 210 working days, which is conditioned upon Princeton obtaining a building permit from the city of Port St. Lucie, is illusory.”); Kreller Group, Inc. v. WFS Fin., Inc., 798 N.E.2d 1179, 1186 (Ohio Ct. App. 2003) (“A party who states, I promise to render a future performance, if I want to when the time arrives has made no promise at all.”); Mattei v. Hopper, 330 P.2d 625, 626 (Cal. 1958) (“Whether [a problem is] couched in terms of mutuality of obligation or the illusory nature of a promise, the underlying issue is the same—consideration.”).

⁵⁷348 N.W.2d 842 (Neb. 1984).

⁵⁸Id. at 845; see also Carter v. U.S., 102 Fed. Cl. 61, 69 (Fed. Cl. 2011) (court finds a binding contract once an order is placed).

⁵⁹118 N.E. 214 (N.Y. 1917); see also Marco Specialties, Inc. v. Legacy Circuit Enters. LLC, 2013 WL 178368, *5 (D.S.C. 2013) (discussing Wood v. Lucy).

⁶⁰Id. at 214.

⁶¹Id. at 214 (quoting McCall Co. v. Wright, 117 N.Y.S. 775, 779 (N.Y. App. Div. 1909)); see also Avasthi & Assoc., Inc. v. Banik, 343 S.W.3d 260, 264 (Tex. App. 2011) (“[C]ourts strive to construe a contract to promote mutuality and to avoid a construction that makes promises illusory.”); M&G Polymers USA, LLC v. Tackett, 135 S.Ct. 926 (2015) (promises only partly illusory are enforceable).

⁶²See Robert A. Hillman, “Instinct with an Obligation” and the “Normative Ambiguity of Rhetorical Power,” 56 Ohio St. L.J. 775 (1995).

⁶³Wood, 118 N.E. at 214–15 (quoting The Moorcock, 14 P.D. 64, 68 (1889)).

⁶⁴Id. at 215.

⁶⁵See, e.g., Brack v. Brownlee, 273 S.E.2d 390 (Ga. 1980); Mattei v. Hopper, 330 P.2d 625 (Cal. 1958). For a more comprehensive discussion of the meaning of good faith performance, see Chapter 7, Section (B)(4) of this book.

⁶⁶Mattei, 330 P.2d at 626–27.

⁶⁷Id.

⁶⁸Id. at 627.

⁶⁹See Gibson v. Cranage, 39 Mich. 49, 50 (1878) (“Artists or third parties might consider a portrait an excellent one, and yet it prove very unsatisfactory to the person who had ordered it and who might be unable to point out with clearness or certainty the defects or objections.”)

⁷⁰Omri Ben-Shahar & James J. White, Boilerplate and Economic Power in Auto Manufacturing Contracts, 104 Mich. L. Rev. 953, 958 n. 20 (2006).

⁷¹See Weiner v. McGraw-Hill, Inc., 443 N.E.2d 441 (N.Y. 1982).

⁷²See id. at 444 (referring to the “not uncommon analytical error of engaging in a search for ‘mutuality’, which is not always essential to a binding contract, rather than of seeking to determine the presence of consideration, which is a fundamental requisite”); see also Kamboj v. Lilly & Co., 2007 WL 178434, at *8 (N.D. Ill. 2007) (“Absent special circumstances, the mere relinquishment of a prior job to take a new job is insufficient consideration. But if the employee’s forbearance is a ‘specially bargained for detriment,’ or causes the employee to suffer a particular detriment, it can be said that the employee has surrendered something of value in exchange for the promise of employment, and therefore that adequate consideration exists.”).

⁷³See, e.g., McGowan v. Homewad Residential, Inc., 2012 WL 6115984, *2 (11th Cir. 2012) (agreement for reduced payments to bank not supported by consideration); Diederich Ins. Agency, LLC v. Smith, 952 N.E.2d 165, 169 (Ill. App. Ct. 2011) (“If defendant was already obligated not to compete against plaintiff, we fail to see how his promise not to compete for 12 months could be new, valid consideration.”); Shore v. Peterson, 204 P.3d 1114, 1120 (Idaho 2009) (“[A] promise to perform something that one has a pre-existing legal obligation to do is not adequate consideration to support a contract.”); International Paper Co. v. Suwyn, 951 F. Supp. 445, 448 (S.D.N.Y. 1997) (“[A] promise to perform an existing legal or contractual obligation is, without more, insufficient consideration to form a new contract.”); Schwartzreich v. Bauman-Basch, Inc., 131 N.E. 887, 889 (N.Y. 1921) (“Any change in an existing contract, such as a modification of the rate of compensation, or a supplemental agreement, must have a new consideration to support it.”).

⁷⁴See United States v. Stump Home Specialties Mfg., Inc., 905 F.2d 1117, 1121 (7th Cir. 1990) (“By hypothesis the parties already have a contract, so that the danger of mistaking casual promissory language for an intention to be legally bound is slight * * *.”).

⁷⁵131 N.E. 887 (1921).

⁷⁶Id. at 890 (“There is no reason that we can see why the parties to a contract may not come together and agree to cancel and rescind an existing contract, making a new one in its place.”); see also Int’l Paper, 951 F. Supp. at 448 (party who signed a non-competition agreement during the course of his at-will employment, without receiving new consideration, “effectively assented to [that] modification and commenced employment under new terms”).

⁷⁷131 N.E. at 888–89.

⁷⁸Id. at 888–90.

⁷⁹See id. at 888, 890; see also Alaska Packers’ Ass’n v. Domenico, 117 F. 99 (9th Cir. 1902) (finding coercion); Recker v. Gustafson, 279 N.W.2d 744 (Iowa 1979) (applying the preexisting duty doctrine to a land sale modification agreement that appeared to have been coerced).

⁸⁰UCC § 2–209(1).

⁸¹UCC § 2–209, cmt. 2.

⁸²See, e.g., Romero v. Buhimschi, 2009 WL 92226, at *5 (E.D. Mich. 2009) (“Under the ‘preexisting duty rule, * * * it is well settled that doing what one is legally bound to do is not consideration for a new promise.’ Thus, once a person has assumed a contractual duty to perform a certain act, his or her subsequent promise to do the same act * * * cannot be consideration for a second contract.”) (quoting Yerkovich v. AAA, 610 N.W.2d 542, 550–51 (Mich. 2000)); see also Yerkovich v. AAA, 610 N.W.2d 542 (Mich. 2000); Johnson v. Maki & Assocs., Inc., 682 N.E.2d 1196 (Ill. App. Ct. 1997); Jaynes v. Strong-Thorne Mortuary, Inc., 954 P.2d 45 (N.M. 1997).

⁸³Restatement (Second) of Contracts § 89(a).

⁸⁴See generally Robert A. Hillman, Contract Modification Under the Restatement (Second) of Contracts, 67 Cornell L. Rev. 680 (1982).

⁸⁵Section 1–308 of the Uniform Commercial Code (UCC) provides:

Performance or Acceptance Under Reservation of Rights

(1)A party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice,” “under protest,” or the like are sufficient.

(2)Subsection (1) does not apply to an accord and satisfaction.

Section 1–308 allows a party explicitly to reserve her rights even if she “performs or promises performance or assents to performance” different from the parties’ agreement. However, subsection 1–308(2) states that the section does not apply to an accord and satisfaction. UCC Article 3, section 3–311 now regulates accord and satisfaction by check and for the most part follows the assertion made in the text that accompanies this footnote. However, the section’s intricacies are beyond the scope of this book and, for that matter, your first-year contracts course.

⁸⁶See infra Chapter 7, Section (B)(1)(b).

⁸⁷Section 281(1) of the Restatement (Second) defines an accord as “a contract under which an obligee promises to accept a stated performance in satisfaction of the obligor’s existing duty.” It is executory because Alice has until August 1 to pay you.

⁸⁸125 N.E. 94 (N.Y. 1919). See supra notes 11–12, 37–38, and accompanying text.

⁸⁹125 N.E. at 95.

⁹⁰See, e.g., United Res. Recovery Corp. v. Ramko Venture Mgmt., Inc., 584 F. Supp. 2d 645, 656 (S.D.N.Y. 2008) (“ ‘The general rule in New York is that past consideration is not consideration, because the promise was not induced by the consideration.’ ”) (quoting Arnone v. Deutsche Bank, AG, 2003 WL 21088514, at *3 (S.D.N.Y. 2003)); In re Estate of Lovekamp, 24 P.3d 894 (Okla. Civ. App. 2001); Carlisle v. T & R Excavating, Inc., 704 N.E.2d 39 (Ohio Ct. App. 1997); Mont. Pub. Employee’s Ass’n v. Office of Governor, 898 P.2d 675 (Mont. 1995).

⁹¹36 S.E.2d 227 (N.C. 1945).

⁹²Id. at 227.

⁹³See Mills v. Wyman, 20 Mass. (3 Pick.) 207 (1825).

⁹⁴Id.

⁹⁵Geoffrey R. Watson, In the Tribunal of Conscience: Mills v. Wyman Reconsidered, 71 Tul. L. Rev. 1749, 1755 (1997) (quoting court records).

⁹⁶Strangely, a recent law review article reports that Levi Wyman didn’t die, despite the court opinion reporting his death. See id. at 1756.

⁹⁷Mills, 20 Mass. (3 Pick.) at 209.

⁹⁸See Frederick Schauer, Playing by the Rules: A Philosophical Examination of Rule-Based Decision-Making in Law and in Life 95–96 (1991).

⁹⁹Mills, 20 Mass. (3 Pick.) at 210–211.

¹⁰⁰Id. at 211.

¹⁰¹168 So. 196 (Ala. Ct. App. 1935).

¹⁰²Id. at 197.

¹⁰³Id.; see also Edson v. Poppe, 124 N.W. 441 (S.D. 1910).

¹⁰⁴Webb, 168 So. at 197 (discussing Boothe v. Fitzpatrick, 36 Vt. 681 (1864)).

¹⁰⁵Id. at 198; see also Boothe v. Fitzpatrick, 36 Vt. 681 (1864).

¹⁰⁶Restatement (Second) of Contracts § 86(1).

¹⁰⁷Id. § 86(2)(a).

¹⁰⁸Id. § 86(2)(b).

¹⁰⁹Id. § 86, cmt. i (“[A] promise is not enforceable under [Section 86] beyond the amount of the benefit.”).

¹¹⁰In case you forgot, Part A of this chapter is chock full of discussion about all of these observations.

¹¹¹Steven Weber, The Success of Open Source 84 (2004).

¹¹²See Robert A. Hillman & Maureen A. O’Rourke, Rethinking Consideration in the Electronic Age, 61 Hastings L. J. 311 (2009) .

¹¹³See supra notes 6–7, and accompanying text.

¹¹⁴See supra notes 13–15, and accompanying text.

¹¹⁵Hillman & O’Rourke, supra note 112, at 329 (quoting Jyh-An Lee, New Perspectives on Public Goods Production: Policy Implications of Open Source Software, 9 Vand. J. Ent. & Tech. L. 45, 55 (2006) and Weber, supra note 111, at 84); see also Jacobsen v. Katzer, 535 F.3d 1373, 1379 (Fed. Cir. 2008) (“The lack of money changing hands in open source licensing should not be presumed to mean that there is no economic consideration, however. There are substantial benefits, including economic benefits, to the creation and distribution of copyrighted works under public licenses that range far beyond traditional license royalties. For example, program creators may generate market share for their programs by providing certain components free of charge. Similarly, a programmer or company may increase its national or international reputation by incubating open source projects. Improvement to a product can come rapidly and free of charge from an expert not even known to the copyright holder.”).

¹¹⁶Hillman & O’Rourke, supra note 112, at 330–331.

¹¹⁷For a definition of agreement, see Restatement (Second) of Contracts § 3 (“An agreement is a manifestation of mutual assent on the part of two or more persons.”).

¹¹⁸See infra note 270, and accompanying text.

¹¹⁹See the introduction to this chapter.

¹²⁰E. Allan Farnsworth, Contracts 114 (4th ed. 2004) (indicating that under the objective approach, what controls are “the external or objective appearance of the parties’ intentions as manifested by their actions”).

¹²¹84 S.E.2d 516 (Va. 1954).

¹²²Id. at 518.

¹²³Id. at 520.

¹²⁴Id.

¹²⁵Id. at 521.

¹²⁶Id.

¹²⁷Id. (quoting First Nat’l. Exch. Bank of Roanoke v. Roanoke Oil Co., 192 S.E. 764, 770 (Va. 1937)); see also Dyer v. Bilaal, 983 A.2d 349, 361 (D.C. 2009) (“Pursuant to the objective theory of contract law, we hold parties to the promises they articulate, without attempting to discern their unexpressed intentions.”).

¹²⁸84 S.E.2d at 521–22.

¹²⁹See, e.g., Embry v. Hargadine, McKittrick Dry Goods Co., 105 S.W. 777, 780 (Mo. Ct. App. 1907) (“It was only necessary that [the promisee], as a reasonable man, had a right to and did so understand [that the promisor intended to contract].”).

¹³⁰See Lon L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages, 46 Yale L.J. 52, 61 (1936) (“[T]here is * * * a policy in favor of promoting and facilitating reliance on * * * agreements.”).

¹³¹See, e.g., Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691, 702 (2d Cir. 1998) (“[I]t is the intent of the parties which controls the interpretation of contracts.”); Octagon Gas Sys., Inc. v. Rimmer, 995 F.2d 948, 953 (10th Cir. 1993) (“In construing the meaning of a written contract, the intent of the parties controls.”); Holbrook v. United States, 194 F. Supp. 252, 255 (D. Or. 1961) (“[T]he intention of the parties * * * controls the contract’s interpretation and when that is ascertained, it is conclusive.”).

¹³²See, e.g., Obermeyer Hydro Accessories, Inc. v. CSI Calendering, Inc., 852 F.3d 1008, 1015 (10th Cir. 2017) (“In determining whether there was a meeting of the minds, Texas employs an ‘objective standard of what the parties said and did.’ Copeland v. Alsobrook, 3 S.W.3d 598, 604 (Tex. App. 1999).”).

¹³³Hotchkiss v. National City Bank of N.Y., 200 F. 287, 293 (S.D.N.Y. 1911), aff’d, 201 F. 664 (2d Cir. 1912), aff’d, 231 U.S. 50 (1913). In fact, this passage is so often quoted, that I feel compelled to quote it again in Chapter 7. See also Kolodziej v. Mason, 774 F.3d 736 (11th Cir. 2014) (no contract under the objective test).

¹³⁴Joseph M. Perillo, The Origins of the Objective Theory of Contract Formation and Interpretation, 69 Fordham L. Rev. 427, 427–29 (2000).

¹³⁵Id. at 429–30.

¹³⁶For example, courts treat “the vast majority of family arrangements” as without legal consequences. Morrow v. Morrow, 612 P.2d 730, 732 (Okla. App. 1980). See also Knutson v. Sirius XM Radio, Inc. 771 F.3d 559, 565 (9th Cir. 2014) (proof of assent may consist of writings, spoken words, or conduct). Courts should not rely on their own “general suppositions,” however. M&G Polymers USA, LLC v. Tackett, 135 S.Ct. 926 (2015).

¹³⁷Cargill Comm’n Co. v. Mowery, 161 P. 634 (Kan. 1916), opinion modified 162 P. 313 (Kan.1917) (seller intended to sell 3,500 bushels, but was obligated to sell 35,000 because he mistakenly used a term that meant 35,000).

¹³⁸Embry v. Hargadine, McKittrick Dry Goods Co., 105 S.W. 777, 780 (Mo. Ct. App. 1907) (employee reasonably understood as assent employer’s statement, “[g]o ahead, you’re all right * * * don’t let that worry you”).

¹³⁹1 Arthur L. Corbin, Corbin on Contracts 28 (2d ed.1993); see, e.g., Rucker v. Taylor, 828 N.W.2d 595 (Iowa 2013) (no offer where too many indefinite terms).

¹⁴⁰See supra notes 119–138, and accompanying text; see also Kolodziej v. Mason, 774 F.3d 736, 741 (11th Cir. 2014) (objective test of offer and acceptance); Restatement (Second) of Contracts § 24 (“An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.”).

¹⁴¹Lefkowitz v. Great Minneapolis Surplus Store, Inc., 86 N.W.2d 689, 690 (Minn. 1957).

¹⁴²See supra notes 121–130, and accompanying text.

¹⁴³86 N.W.2d 689, 690 (Minn. 1957).

¹⁴⁴Id. at 691; see also Trell v. Am. Ass’n for Advancement of Sci., 310 F. App’x. 447, 447–48 (2d Cir. 2009) (distinguishing advertisements that are not offers).

¹⁴⁵Kolodziej v. Mason, 774 F.3d 736, 743 (11th Cir. 2014) (A commercial advertisement must be “clear, definite, and explicit” to constitute an offer); Restatement (Second) of Contracts § 26, cmt. b.

¹⁴⁶86 N.W.2d at 690.

¹⁴⁷519 N.W.2d 460 (Minn. Ct. App. 1994).

¹⁴⁸Id. at 462.

¹⁴⁹Id. at 463; see also Sun City Pet Market LLC v. Honest Kitchen, Inc., 2017 WL 2255400, *3 (D. Ariz. 2017) (the party providing a price list or advertisement explicitly stated that items and prices may vary).

¹⁵⁰Russell, 519 N.W.2d at 463.

¹⁵¹See infra notes 161–173, and accompanying text.

¹⁵²Nebraska Seed Co. v. Harsh, 152 N.W. 310, 311 (Neb. 1915).

¹⁵³Id. at 310; see also Fletcher-Harlee Corp. v. Pote Concrete Contractors, Inc., 482 F.3d 247, 249 (3d Cir. 2007) (“When the text of a subcontractor’s bid, which would typically be a firm offer, specifically states that it is not one, we must follow that text.”).

¹⁵⁴Fairmount Glass Works v. Crunden-Martin Woodenware Co., 51 S.W. 196 (Ky. 1899).

¹⁵⁵Stelluti Kerr, LLC v. Mapei Corp., 703 F. App’x 214, 224 (5th Cir. 2017) (detailed price quotation of 50 pages, containing all the elements of a contract and following “numerous meetings and communications” was an offer).

¹⁵⁶See NBC Pays Off Geraldo’s $10,000 Challenge, Nat’l L.J., Feb. 22, 1999, at A28.

¹⁵⁷See Leonard v. Pepsico, 88 F. Supp. 2d 116 (S.D.N.Y. 1999).

¹⁵⁸See generally Keith A. Rowley, You Asked for It, You Got It * * * Toy Yoda: Practical Jokes, Prizes, and Contract Law, 3 Nev. L. J. 526 (2003).

¹⁵⁹See Augstein v. Leslie, 2012 WL 4928914 (S.D.N.Y 2012); Bruce Golding, Rapper Ordered to Pay the $1M Reward he Promised for Recovery of Stolen Laptop, New York Post (Nov. 29, 2012), https://nypost.com/2012/11/29/rapper-ordered-to-pay-the-1m-reward-he-promised-for-recovery-of-stolen-laptop/.

¹⁶⁰Spoiler alert! The court ultimately determined that the defense attorney’s challenge was a colloquial wager, and a reasonable person would recognize that “[t]he exaggerated amount of ‘a million dollars’—the common choice of movie villains and schoolyard wagerers alike—indicates that this was hyperbole,” and therefore did not constitute an offer. Kolodziej v. Mason, 774 F.3d 736, 741 (11th Cir. 2014).

¹⁶¹Restatement (Second) of Contracts § 50(1).

¹⁶²Ardente v. Horan, 366 A.2d 162, 165 (R.I. 1976) (“We must be concerned only with the language actually used, not the language [the offeree] thought he was using or intended to use.”); see also Thacker v. Massman Constr. Co., 247 S.W.2d 623, 629–30 (Mo. 1952) (“An uncommunicated intention to accept an offer is not an acceptance.”).

¹⁶³See, e.g., Knutson v. Sirius XM Radio Inc., 771 F.3d 559, 565–566 (9th Cir. 2014); see also Nicosia v. Amazon.com, Inc., 834 F.3d 220, 232 (2d Cir. 2016).

¹⁶⁴Lefkowitz v. Great Minneapolis Surplus Store, Inc., 86 N.W.2d 689, 691 (Minn. 1957).

¹⁶⁵Ardente, 366 A.2d at 163.

¹⁶⁶Id. at 166.

¹⁶⁷Id.

¹⁶⁸See supra notes 119–138, and accompanying text.

¹⁶⁹Ducommun v. Johnson, 110 N.W.2d 271, 274 (Iowa 1961).

¹⁷⁰James v. Global TelLink Corp., 852 F.3d 262, 266 (3d Cir. 2017) (“Silence does not ordinarily manifest assent, but the relationships between the parties or other circumstances may justify the offeror’s expecting a reply and, therefore, assuming that silence indicates assent to the proposal.”) (quoting Weichert Co. Realtors v. Ryan, 128 N.J. 427, 608 A.2d 280, 284 (N.J. 1992)).

¹⁷¹Restatement (Second) of Contracts § 69(1)(a); see Steuart Inv. Co. v. The Meyer Grp., Ltd., 61 A.3d 1227 (D.C. 2013) (adopting Restatement approach).

¹⁷²Id. § 69(1)(c).

¹⁷³39 U.S.C. § 3009 (1994).

¹⁷⁴Gosiger, Inc. v. Elliott Aviation, Inc., 823 F.3d 497, 502 (8th Cir. 2016) (acceptance must not deviate from offer); Bergey v. HSBC Bank USA, 2010 WL 2395506 (Ct. App. Ohio 2010) (offeree must strictly comply with an offeror’s prescriptions); Restatement (Second) of Contracts § 58.

¹⁷⁵Id. § 59 (“A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.”).

¹⁷⁶See supra notes 139–140, and accompanying text.

¹⁷⁷See, e.g., Agema v. City of Allegan, 826 F.3d 326, 333 (6th Cir. 2016) (acceptance must mirror the offeror’s terms); Restatement (Second) of Contracts § 58 (“An acceptance must comply with the requirements of the offer as to the promise to be made or the performance to be rendered.”).

¹⁷⁸Restatement (Second) of Contracts § 60.

¹⁷⁹See Allied Steel & Conveyors, Inc. v. Ford Motor Co., 277 F.2d 907, 910–11 (6th Cir. 1960) (distinguishing a prescribed and a suggested method of acceptance).

¹⁸⁰See id. at 909, 911 (offer stating that “[a]cceptance should be executed on acknowledgment copy which should be returned to the buyer” was only a suggestion).

¹⁸¹See infra notes 206–210, and accompanying text.

¹⁸²See supra notes 119–138, and accompanying text.

¹⁸³UCC § 2–206(1)(a).

¹⁸⁴See supra note 17, and accompanying text.

¹⁸⁵Here’s a practice test for you (don’t worry, with answers) based on a real event: Julian Assange, the founder of WikiLeaks, tweeted an offer to agree to extradition to the U.S. if President Obama commuted Chelsea Manning’s sentence. Manning had leaked classified information to WikiLeaks, which had published the information. President Obama later commuted Manning’s sentence, but the White House denied that the motive was to accept Assange’s offer. Did Assange make an offer? (yes) For a unilateral or bilateral contract? (unilateral) Was there an acceptance? (yes, if a reasonable person would believe President Obama intended to accept the offer) Was there consideration to support Assange’s promise? (not if the President was going to commute Manning’s sentence regardless of the offer) At any rate, Assange later claimed through his U.S. lawyer that President Obama’s commutation was “well short of what [Assange] sought.” See Joe Uchill, Assange Lawyer: Manning Commutation Doesn’t Meet Extradition Offer’s Conditions, The Hill (Jan. 18, 2017 10:33 AM), http://‌the‌hill.com/policy/cybersecurity/314783-assange-lawyer-conditions-not-met-for-assange-manning-extradition-offer.

For another recent example of an offer for a unilateral contract, see Kearney v. Equilon Enterprises, LLC, 65 F. Supp.3d 1033, 1039 (D. Or. 2014) (gasoline station offer says “Buy 10 gallons of fuel, get a voucher for a free [ski] lift ticket!”); see also Kolodziej v. Mason, 774 F.3d 736, 740 (11th Cir. 2014) (promise in exchange for performance).

¹⁸⁶Restatement (Second) of Contracts § 45(1). According to some courts, if a credit card company issues a card to you, the company has made an offer for a unilateral contract. If you use the card, you have accepted the offer for the amount of your purchase. See, e.g., In re Pettingill, 403 B.R. 624, 628 (Bankr. E.D. Ark. 2009).

¹⁸⁷The Restatement once included language recognizing the distinction between unilateral and bilateral contracts. See Restatement (First) of Contracts § 45; see also Herring v. Parking Concepts, Inc., 2010 WL 1038396 (Cal. Ct. App. 2010) (using unilateral and bilateral terminology).

¹⁸⁸See, e.g., Fosson v. Palace (Waterland), Ltd., 78 F.3d 1448, 1454–55 (9th Cir. 1996) (“[A]bsent any evidence to rebut the presumption of a bilateral contract, we cannot conclude that a valid unilateral contract was formed.”); National Dairymen Ass’n v. Dean Milk Co., 183 F.2d 349, 352–53 (7th Cir. 1950), cert denied, 340 U.S. 876 (1950); Davis v. Jacoby, 34 P.2d 1026, 1030 (Cal. 1934).

¹⁸⁹Restatement (Second) of Contracts § 32.

¹⁹⁰For similar facts, see Davis v. Jacoby, 34 P.2d 1026, 1030 (Cal. 1934).

¹⁹¹White v. Corlies, 46 N.Y. 467, 467 (1871).

¹⁹²Id. at 470.

¹⁹³See Allied Steel & Conveyors, Inc. v. Ford Motor Co., 277 F.2d 907, 911 (6th Cir. 1960) (“It is well settled that acceptance of an offer by part performance in accordance with the terms of the offer is sufficient to complete the contract.”).

¹⁹⁴Restatement (Second) of Contracts § 36.

¹⁹⁵Id. § 36(1)(a)–(c), (2).

¹⁹⁶See supra notes 174–183, and accompanying text.

¹⁹⁷See, e.g., Siegel v. Warner Bros. Ent. Inc., 542 F. Supp. 2d 1098, 1137 (C.D. Cal. 2008) (“[T]he terms proposed in an offer must be met exactly, precisely, and unequivocally for its acceptance to result in the formation of a binding contract.”); Lewis v. Adams, 979 S.W.2d 831, 834 (Tex. App. 1998) (“[A]n acceptance must not change or qualify the terms of an offer; if it does * * * the modification * * * becomes a counteroffer.”); Restatement (Second) of Contracts § 59, cmt. a (“A qualified or conditional acceptance * * * is a counter-offer and ordinarily terminates the power of acceptance of the original offeree.”); see also Restatement (Second) of Contracts § 39(2).

¹⁹⁸Akers v. J. B. Sedberry, Inc., 286 S.W.2d 617, 622 (Tenn. Ct. App. 1955) (quoting Williston, supra note 5, at 145) (“ ‘An offer is rejected when the offeror is justified in inferring from the words or conduct of the offeree that the offeree intends not to accept the offer * * *.’ ”).

¹⁹⁹See, e.g., Burden v. Johnson & Johnson Med., 530 F.3d 389 (5th Cir. 2008) (“ ‘[O]nce an offer is rejected, the general rule is that the offer is thereby terminated, and consequently it cannot be accepted.’ ”) (quoting Harris v. Mickel, 15 F.3d 428, 431 (5th Cir. 1994)); Energy Mktg. Servs., Inc. v. Homer Laughlin China Co., 186 F.R.D. 369, 374 (S.D. Ohio 1999) (“When an offer is rejected, it ceases to exist, and a subsequent attempted acceptance is inoperative to bind the offeror.”); Akers v. J. B. Sedberry, Inc., 286 S.W.2d 617, 621 (Tenn. Ct. App. 1955).

²⁰⁰See Farnsworth, supra note 120, at 160.

²⁰¹Akers, 286 S.W.2d at 620.

²⁰²Id. at 622.

²⁰³See supra notes 175–177, and accompanying text.

²⁰⁴See Restatement (Second) of Contracts § 38(2) (“A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.”); see also APS v. U.S. Bank, 2009 WL 4723311 (D. Minn. 2009) (distinguishing counter-offers from negotiation); Melvin Aron Eisenberg, Expression Rules in Contract Law and Problems of Offer and Acceptance, 82 Cal. L. Rev. 1127, 1159 (1994) (“In the ordinary case * * * the proposition that a counter-offer implies a rejection and takes the offer off the table seems incorrect * * *.”).

²⁰⁵See, e.g., South Cent. Steel, Inc. v. McKnight Constr. Co., 263 F. App’x 806, 809 (11th Cir. 2008) (“South Central can not have it both ways: it cannot first send a counter-offer and then—without agreement by McKnight Construction—later accept the original offer. The counter offer operated as a rejection of the Purchase Order.”); Jericho Group, Ltd. v. Midtown Dev., L.P., 32 A.D.3d 294, 299 (N.Y. App. Div. 2006) (“[I]t is a fundamental tenet of contract law that a counteroffer constitutes a rejection of an offer as matter of law. Rejection by counteroffer extinguishes the offer and renders any subsequent acceptance thereof inoperative.” (citations omitted)).

²⁰⁶See, e.g., Akers, 286 S.W.2d at 621; Restatement (Second) of Contracts § 41(1). If the offeror specifies the time an offer remains open, the offeree must accept by the deadline. See, e.g., Aliberti v. GMAC Mortg., LLC, 779 F. Supp. 2d 242, 247 (D. Mass. 2011) (“power of acceptance vanished at the time specified”).

²⁰⁷Restatement (Second) of Contracts § 41, cmt. b; see also Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 709 F.3d 872, 877 (9th Cir. 2013) (reasonable time might be 3 to 4 years after offer made).

²⁰⁸Akers, 286 S.W.2d at 621; see also Restatement (Second) of Contracts § 41, cmt. d (“Where the parties bargain face to face or over the telephone, the time for acceptance does not ordinarily extend beyond the end of the conversation unless a contrary intention is indicated.”).

²⁰⁹These are essentially the facts of Vaskie v. West Am. Ins. Co., 556 A.2d 436 (Pa. Super. Ct. 1989).

²¹⁰Id. at 440.

²¹¹See Restatement (Second) of Contracts § 42 (“An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.”).

²¹²Id. But it is too late to revoke an offer, of course, after the offeree accepts the offer. See, e.g., Heritage Bldg. Prop. LLC v. Prime Income Asset Mgmt., Inc., 43 So. 3d 1138, 1143 (Miss. Ct. App. 2009) (“It was only after * * * assent had been communicated to the Buyers that the Buyers attempted to revoke their offer. By that time, we find it was too late.”).

²¹³Shuey v. United States, 92 U.S. 73 (1875).

²¹⁴See, e.g., Hoover Motor Exp. Co. v. Clements Paper Co., 241 S.W.2d 851, 853 (Tenn. 1951) (“It is sufficient to constitute a withdrawal [of an offer] that knowledge of acts by the offer[or] inconsistent with the continuance of the offer is brought home to the offeree.”); Dickinson v. Dodds, 2 Ch. D. 463 (1876).

²¹⁵See infra notes 252–269, and accompanying text.

²¹⁶See supra notes 211–215, and accompanying text.

²¹⁷See supra notes 1–12, and accompanying text.

²¹⁸Dickinson, 2 Ch. D. 463 (1876); see also Restatement (Second) of Contracts § 42, cmt. a (“[T]he ordinary offer is revocable even though it expressly states the contrary, because of the doctrine that an informal agreement is binding as a bargain only if supported by consideration.”).

²¹⁹See supra notes 73–87, and accompanying text.

²²⁰See, e.g., Marsh v. Lott, 97 P. 163 (Cal. Dist. Ct. App. 1908); see also Kowalchuk v. Stroup, 61 A.D.3d 118, 125, 873 N.Y.S.2d 43, 48–49 (N.Y. App. Div. 2009) (“offer, accompanied by some form of consideration, may protect an offeree, by entitling the offeree to treat the offer as irrevocable within specific time constraints.”).

²²¹Id. at 165.

²²²1464-Eight Ltd. & Millis v. Joppich, 154 S.W.3d 101 (Tex. 2004); Restatement (Second) of Contracts § 87, cmt. a (the option contract “serves a useful purpose even though no preliminary bargain is made: it is often a necessary step in the making of the main bargain proposed, and it partakes of the natural formalities inherent in business transactions”).

²²³Restatement (Second) of Contracts § 87(1)(a) (emphasis added); see 1464-Eight Ltd. & Millis, 154 S.W.3d 101.

²²⁴See supra notes 33–40, and accompanying text.

²²⁵Restatement (Second) of Contracts § 87(1)(b).

²²⁶UCC § 2–104(1) defines the term “merchant.”

²²⁷See supra notes 184–193, and accompanying text.

²²⁸See Mark Pettit, Modern Unilateral Contracts, 63 B.U. L. Rev. 551, 564–67 (1983).

²²⁹See, e.g., Brackenbury v. Hodgkin, 102 A. 106 (Me. 1917).

²³⁰See id.

²³¹I. Maurice Wormser, The True Conception of Unilateral Contracts, 26 Yale L.J. 136, 136–38 (1916). His retraction appears in I. Maurice Wormser, Book Review, 3 J. Legal Educ. 145, 146 (1950).

²³²Restatement (First) of Contracts § 45.

²³³Farnsworth, supra note 120, at 542 (quoting Restatement (Second) of Contracts § 263, cmt. b).

²³⁴Restatement (Second) of Contracts § 45(1) (“Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.”).

²³⁵See supra note 220, and accompanying text.

²³⁶Restatement (Second) of Contracts § 45(2).

²³⁷Id. § 54(2)(a).

²³⁸UCC § 2–206(2).

²³⁹See, e.g., Whitewood v. Robert Bosch Tool Corp., 2006 WL 2873426, at *2 (W.D. Ky. 2006) (“Courts have differed in considering whether partial performance constitutes a binding acceptance in the context of a unilateral contract, but the Sixth Circuit has held that ‘an acceptance of an offer by part performance in accordance with the terms of the offer is sufficient to complete the contract.’ Despite a dearth of Kentucky case law on point, it is clear that courts are hesitant to allow an offeror to revoke an offer after partial performance in accordance with its terms.”).

²⁴⁰Petterson v. Pattberg, 161 N.E. 428 (N.Y. 1928).

²⁴¹Id.

²⁴²Restatement (Second) of Contracts § 54.

²⁴³Id.

²⁴⁴See supra notes 184–185, and accompanying text.

²⁴⁵See supra notes 227–243, and accompanying text.

²⁴⁶333 P.2d 757 (Cal. 1958).

²⁴⁷See Klose v. Sequoia Union High Sch. Dist., 258 P.2d 515, 517 (Cal. Dist. Ct. App. 1953) (“A subcontractor bidder merely makes an offer that is converted into a contract by a regularly communicated acceptance conveyed to him by the general contractor.”).

²⁴⁸Drennan, 333 P.2d at 415 (“[A] general contractor is not free to delay acceptance after he has been awarded the general contract in the hope of getting a better price.”); see also Holman Erection Co. v. Orville E. Madsen & Sons, Inc., 330 N.W.2d 693, 698 (Minn. 1983) (“Binding general contractors to subcontractors because a particular bid was listed in the general bid or was utilized in making the bid would remove a considerable degree of needed flexibility.”).

²⁴⁹Drennan, 333 P.2d at 759–60.

²⁵⁰See James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344 (2d Cir. 1933). But see G. Richard Shell, Opportunism and Trust in the Negotiation of Commercial Contracts: Toward a New Cause of Action, 44 Vand. L. Rev. 221, 248 (1991) (“Gimbel’s approach toward the subcontractor-contractor relationship has been rejected by most modern courts.”).

²⁵¹Drennan, 333 P.2d at 761.

²⁵²Adams v. Lindsell, 106 Eng. Rep. 250, 251 (K.B. 1818).

²⁵³See Lewis v. Browning, 130 Mass. 173, 175–76 (1880) (“[T]he person making the offer may always, if he chooses, make the formation of the contract which he proposes dependent upon the actual communication to himself of the acceptance.”); see also supra notes 174–183, and accompanying text.

²⁵⁴See supra notes 216–226, and accompanying text.

²⁵⁵Restatement (Second) of Contracts § 42 (“An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.”); see supra notes 211–213, and accompanying text.

²⁵⁶See, e.g., Lewis, 130 Mass. at 175 (“[T]he contract has been deemed to be completed as soon as the letter of acceptance has been put into the post-office duly addressed.”).

²⁵⁷Morrison v. Thoelke, 155 So.2d 889, 904 (Fla. Dist. Ct. App. 1963) (“[T]he offeror can always expressly condition the contract on his receipt of an acceptance and, should he fail to do so, the law should not afford him this advantage.”).

²⁵⁸Farnsworth, supra note 120, at 171.

²⁵⁹Morrison, 155 So.2d at 904–05 (“Outmoded precedents may, on occasion be discarded and the function of justice should not be the perpetuation of error, but, by the same token, traditional rules and concepts should not be abandoned save a compelling ground.”).

²⁶⁰Id. at 905 (“[A]n unqualified offer was accepted and the acceptance made manifest. Later, the offerees sought to repudiate their initial assent * * * adopting the view that the acceptance was effective when the letter of acceptance was deposited in the mails [sic], the repudiation was equally invalid * * *.”).

²⁶¹See Chapter 6, Section (E)(3).

²⁶²But a helpful article is Jeremy M. Sklaroff, Smart Contracts and the Cost of Inflexibility, 166 U. PA. L. REV. 263 (2017). The discussion on smart contracts here follows Robert A. Hillman, Article 2 of the UCC: Some Thoughts on Success or Failure in the Twenty-First Century, 23 Barry L. Rev. 165, 171–172 (2018) (symposium in honor of Robert S. Summers and James J. White).

²⁶³Id. at 266–267.

²⁶⁴This illustration, with minor changes, is Skarloff’s. Id. at 273–274.

²⁶⁵Id. “[A] transaction on a computer network with blockchain infrastructure * * * is witnessed by others on the network (distributed), is made public to everyone on the network (open), and cannot be changed without a tremendous amount of computer power or cost (unalterable).” Richard Holden and Anup Malani, Can Blockchains Solve the Holdup Problem in Contracts? 4 (Becker Friedman Inst. for Econ. U. Chi., Working Paper No. 2018–12, 2018).

²⁶⁶Sklaroff, supra note 262, at 274.

²⁶⁷Id. at 267 (discussing supporters of smart contracts).

²⁶⁸See, e.g., Reggie O’Shields, Smart Contracts: Legal Agreements for the Blockchain, 21 N.C. BANKING INST. 177, 183 (2017).

²⁶⁹Skarloff, supra note 262, at 279–286.

²⁷⁰Rudolph B. Schlesinger, Manifestation of Assent Without Identifiable Sequence in Offer and Acceptance, in 2 Formation of Contracts 1583, 1584 (Rudolph B. Schlesinger ed., 1968); see also William Whitford, Ian Macneil’s Contribution to Contracts Scholarship, 1985 Wis. L. Rev. 545, 547 (“If relational contracts lacking a grand meeting of the minds are to be enforced, there is no way to explain the results reached within the structure of classical contract law * * *.”).

²⁷¹See Arnold Palmer Golf Co. v. Fuqua Indus., Inc., 541 F.2d 584, 587 (6th Cir. 1976); see also Landan v. Wal-Mart Real Estate Bus. Trust, 2016 WL 5253329 (W.D. Pa. 2016) (promissory estoppel does not apply where letter of intent expressly provided that there would be no liability until the parties executed a written agreement).

²⁷²Restatement (Second) of Contracts § 27, cmt. b (“[I]f either party knows or has reason to know that the other party regards the agreement as incomplete and intends that no obligation shall exist until other terms are assented to or until the whole has been reduced to another written form, the preliminary negotiations and agreements do not constitute a contract.”); see also AllGood Entm’t, Inc. v. Dileo Entm’t & Touring, Inc., 2010 WL 3322530, at *5 (S.D.N.Y. 2010) (“The surrounding circumstances of this failed endeavor confirms what the plain language of the Binder indicated: that it was merely a preliminary negotiation subject to the agreement of the artists and negotiation of other material terms. As such, the Binder is unenforceable and no breach can be found as a matter of law.”); Landan v. Wal-Mart Real Estate Bus. Trust, 2016 WL 5253329 (W.D. Pa. 2016).

²⁷³Restatement (Second) of Contracts § 27, cmt. a (“Parties who * * * before the final writing is made, agree upon all the terms which they plan to incorporate therein * * * orally or by exchange of several writings. It is possible thus to make a contract the terms of which include an obligation to execute subsequently a final writing which shall contain certain provisions * * *.”).

²⁷⁴Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 72 (2d Cir. 1989) (“[T]he parties can bind themselves to a concededly incomplete agreement * * * in the sense that they accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement * * *.”) (quoting Teachers Ins. & Annuity Ass’n v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987)).

²⁷⁵See supra notes 119–138, and accompanying text.

²⁷⁶84 S.E.2d 516, 522 (Va. 1954) (“[T]he law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. If his words and acts, judged by a reasonable standard, manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind.”); see supra notes 121–132, and accompanying text.

²⁷⁷Arnold Palmer Golf Co., 541 F.2d at 589 (“[T]he entire document and relevant circumstances surrounding its adoption must be considered in making a determination of the parties’ intention.”); Restatement (Second) of Contracts § 27, cmt. c (factors for determining the formation of a contract include “the extent to which express agreement has been reached on all the terms to be included, whether the contract is the type usually put in writing, whether it needs a formal writing for its full expression, whether it has few or many details, whether the amount involved is large or small, * * * and whether either party takes any action in preparation for performance during the negotiations.”).

²⁷⁸Liberty Envtl. Sys., Inc. v. County of Westchester, 2000 WL 1752927, at *3 (S.D.N.Y. 2000) (“[E]ach party [must] act in good faith towards the other party and * * * refrain from engaging in conduct designed to defeat or obstruct the other party’s ability to perform or fulfill the requirements of the [memorandum of understanding].”); Teachers Ins. & Annuity Ass’n v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987); (“[P]arties can bind themselves to concededly incomplete agreement in the sense that they accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement within the scope that has been settled in the preliminary agreement.”).

²⁷⁹Teachers Ins. & Annuity Ass’n., 670 F. Supp. at 498 (“The obligation * * * bar[s] a party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement.”).

²⁸⁰Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 417 N.E.2d 541, 543 (N.Y. 1981) (“[I]t is rightfully well settled * * * that a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable”).

²⁸¹Nebo Constr. Co. v. Southeastern Elec. Constr. Co., 200 F. Supp. 582, 587 (W.D. La. 1961) (“The sheer indefiniteness of this purported contract renders it unenforceable.”); see also Joseph Martin, Jr., Delicatessen, Inc., 417 N.E.2d at 543 (“[B]efore the power of law can be invoked to enforce a promise, it must be sufficiently certain and specific so that what was promised can be ascertained.”).

²⁸²Joseph Martin, Jr., Delicatessen, Inc., 417 N.E.2d at 544 (“[Renewal clause’s] simple words leave no room for legal construction or resolution of ambiguity. Neither tenant nor landlord is bound to any formula. There is not so much as a hint at a commitment to be bound by the ‘fair market rental value’ * * * or the ‘reasonable rent’ * * *.”).

²⁸³Id. at 544 (“This is not to say that the requirement for definiteness * * * could only have been met by explicit expression * * * if a methodology for determining the rent was to be found within the four corners of the lease * * *.”).

²⁸⁴Id.

²⁸⁵118 N.E. 214 (N.Y. 1917); see supra notes 59–64, and accompanying text.

²⁸⁶Mutual Paper Co. v. Hoague-Sprague Corp., 8 N.E.2d 802, 807 (Mass. 1937) (“In * * * the case at bar there is set forth an elaborate method of determining the rent to be paid during the extended period. It cannot be supposed it was the intent of the parties that, at the end of the original tenancy, both parties would then be free to bargain with reference to a new lease.”).

²⁸⁷UCC § 2–204(3).

²⁸⁸UCC § 2–201(1). See Chapter 4, Section (A).

²⁸⁹See supra notes 119–138, and accompanying text.

²⁹⁰See, e.g., American Parts Co. v. American Arbitration Ass’n, 154 N.W.2d 5, 16 (Mich. Ct. App. 1967) (“[B]usinessmen use forms that do not always fit their circumstances and which frequently contain significant modifications of the simple oral agreement of the parties in the form of boiler plate which generally is not read by the other contracting party and perhaps is not expected to be read.”); 1 James J. White, Robert S. Summers & Robert A. Hillman, Uniform Commercial Code 77–78 (6th ed. 2012) (“[S]ometimes the parties will fall into dispute even before occasion for performance * * *. In all these cases the parties will haul out their forms and read them—perhaps for the first time * * *.”).

²⁹¹For an extensive analysis of the section, see Stemcor USA, Inc. v. Trident Steel Corp., 471 F. Supp. 2d 362 (S.D.N.Y. 2006).

²⁹²See infra notes 308–311, and accompanying text.

²⁹³UCC § 2–207.

²⁹⁴UCC § 2–207(1) (“A definite and seasonable expression of acceptance or a written confirmation * * *.”).

²⁹⁵White, Summers & Hillman, supra note 290, at 79–80.

²⁹⁶See, e.g., id. at 32–33 (“[I]t would be more than a little difficult to view a different term in an acceptance as a proposal for addition to the contract where the offer already includes a contrary term.”).

²⁹⁷UCC § 2–207, cmt. 3 (“additional or different terms” come under subsection 2).

²⁹⁸See, e.g., Lea Tai Textile Co., Ltd. v. Manning Fabrics, Inc. 411 F. Supp. 1404, 1407 (S.D.N.Y. 1975) (“Since the arbitration clauses are in hopeless conflict, I find that no contract to arbitrate was made.”); see also White, Summers & Hillman, supra note 290, at 84–85 (“[T]he two terms cancel one another. On this view the seller’s form was only an acceptance of terms in the offer which did not conflict with any terms in the acceptance. Thus, the ultimate deal would not include the arbitration clause.”).

²⁹⁹UCC § 2–207(2) (“Between merchants such terms become part of the contract * * *.”); Hydrodec of North America LLC v. API Heat Transfer, Inc., 2017 WL 3283997, *6 (N.D. Oh. 2017) (“Section 2–207 * * * supplies the framework for determining which terms and conditions apply when merchants engage in a battle of the forms.”).

³⁰⁰UCC § 2–104(1).

³⁰¹UCC § 2–207(2) (“The additional terms are to be construed as proposals for addition to the contract.”); see also UCC § 2–207, cmt. 2 (“[A]ny additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term * * *.”).

³⁰²According to the comments, among other things, disclaimers of warranties and unreasonably short times for making complaints would constitute material alterations. UCC § 2–207, cmt. 4. Terms “enlarging slightly” sellers’ rights to avoid a contract because of unanticipated events and terms limiting remedies “in a reasonable manner” would not be material alterations. Id., cmt. 5.

³⁰³Paul Gottlieb & Co., Inc. v. Alps South Corp., 985 So.2d 1, 8 (Ct. App. Fla. 2007).

³⁰⁴See, e.g., Micor Industries, Inc. v. Mazak Corp., 2018 WL 804303 (N.D. Ala. 2018). In Micor, the seller-manufacturer sent a “sales order confirmation” (SOC) with a forum selection clause and buyer sent back a purchase order (PO) with a conflicting forum selection clause. The PO also stated in part that “different or additional terms * * * are hereby rejected and your acceptance of this order is expressly limited to the specific terms and conditions contained herein.” The court held that this language was insufficient to trigger the “acceptance is expressly made conditional on assent to the additional or different terms” language of 2–207(1) so that the PO constituted an acceptance. See also White, Summers & Hillman, supra note 290, at 90–99 (citing additional cases).

³⁰⁵Restatement (Second) of Contracts § 59 (“A reply to an offer which purports to accept it but is conditional on the offeror’s assent to terms additional to or different from those offered is not an acceptance but is a counter-offer.”).

³⁰⁶UCC § 2–207, cmt. 7 (“In many cases, as where goods are shipped, accepted and paid for before any dispute arises, there is no question whether a contract has been made * * *. [T]he only question is what terms are included in the contract, and subsection (3) furnishes the governing rule.”); Building Materials Corp. of America v. Henkel Corp., 2016 WL 7666151, *7 (M.D. Fla. 2016).

³⁰⁷See UCC §§ 2–305, 2–308, 2–309; see also Glasstech, Inc. v. Chicago Blower Corp., 675 F. Supp. 2d 752, 757–58 (N.D. Ohio 2009), amended (Nov. 24, 2009) (“UCC § 2–207(c) permits the Court to supply terms from other sections of the UCC to supplement the missing warranty provision of the contract.”).

³⁰⁸See Chapter 1, Section (B).

³⁰⁹Amended UCC § 2–103(1)(m) (proposed final draft April 18, 2003).

³¹⁰See Chapter 7, Sections (A)(1)–(7).

³¹¹Principles of the Law of Software Contracts § 2.01(b)(2) (2010).

³¹²Francis J. Mootz, After the Battle of the Forms: Commercial Contracting in the Electronic Age, 4 J. L. & Pol’y for Info. Soc’y 271, 274–275, 279 (2008).

³¹³See generally Robert A. Hillman, Symposium: A Tribute to Professor Joseph M. Perillo: Rolling Contracts, 71 Fordham L. Rev. 743 (2002).

³¹⁴105 F.3d 1147 (7th Cir. 1997).

³¹⁵Id. at 1148 (“[A] box arrives, containing the computer and a list of terms, said to govern unless the customer returns the computer within 30 days.”).

³¹⁶Id. at 1150 (“By keeping the computer beyond 30 days, the Hills accepted Gateway’s offer, including the arbitration clause.”); see also Brower v. Gateway 2000 Inc., 676 N.Y.S.2d 569, 572 (App. Div. 1998) (“[N]o contract was formed here * * * until the merchandise was retained beyond the 30-day period.”).

³¹⁷UCC § 2–207(2) (“The additional terms are to be construed as proposals for addition to the contract.”).

³¹⁸For a discussion of UCC § 2–206(1)(b)’s applicability, see Shubha Ghosh, Where’s the Sense in Hill v. Gateway 2000?: Reflections on the Visible Hand of Norm Creation, 16 Touro L. Rev. 1125, 1132–33 (2000).

³¹⁹See Chapter 6, Sections (D) and (E)(2).

³²⁰Brower, 676 N.Y.S.2d 569 (App. Div. 1998).

³²¹Id. at 575 (“Thus, we modify the order on appeal to the extent of finding that portion of the arbitration provision requiring arbitration before the ICC to be unconscionable * * *.”).