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Contract Formation

Chapter 3 Contract Formation

 

A contract is an agreement and mutual assent reached through a negotiating process, which can be divided into two essential steps,offer and acceptance.

 

I . Mutual Assent

 

In general, before a contract can be formed the parties must mutually assent to the main terms of the agreement. For example,there usually must have mutual assent to the parties,the price ,the time for performance, and the subject matter of the agreement. Whether there is mutu­al assent and the agreed - upon terms, are measured from an objective standpoint. In other words,courts will look to what a reasonable person in the situation of the other party would conclude that his objective manifestation of intent meant. The most common way that a contract is formed is through an offer and acceptance.

 

Offer

 

Definition of Offer

 

The Restatement defines an offer as a" 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 [the bargain]. "Once an offer is made,it creates a power in the offeree to enter into a contract by the offer.

 

Requirements of Offer

 

The contract law of most nations holds that an offer must:

 

Be clear and certain, it may be made orally or in writing or by conduct, and

Be addressed to one or more specific persons , and

Be sufficiently definite and indicates the intention of the offeror to be bound;

Become valid when it arrives at the offeree.

 

Therefore , it is different from;

 

An Invitation Offer,which is not to make an offer,but invite the other party to do so,it is not capable of being turned into a contract by acceptance,e. g. by displaying goods in a shop - window, or an indication of price at which petrol is to be sold at a filling station, or circulation of a price - list by a wine merchant.

 

Advertisement, which is addressed to public, not to specific one or more persons as re­quired by an offer. Most of the nations recognize that an advertisement can never create the power of acceptance in a member of the public who reads the ad, but merely constitute an invi­tation. Meanwhile, however, it is recognized that if an advertisement is specific enough in de­scribing the goods,their quantity and price,it may be considered an offer. Advertisement of re­wards are generally considered as an offer,e. g. for the return of lost or stolen property, or for information leading to arrest or conviction of the perpetrator of a crime, are all treated as offers, because they are clearly made with the intension to be bound as no further bargaining is expec­ted to result from them.

 

Auction; the putting up of goods for sale by auction is not an offer. The person who bids makes an offer which the auctioneer is free to accept or reject and the auctioneer’s request for bids is merely an invitation to treat. The Sale of Goods Ordinance of United Kingdom provides that each higher bid automatically overrides all earlier bids. The auctioneer’s final decision of the successful bid is the only acceptance.

 

Types of Contract

 

There are generally two different types of contracts contemplated by the offer;

 

Bilateral contract; an offer that promises to do something in exchange for another prom­ise is an offer for a bilateral contract. The offer contemplates acceptance by a promise,with per­formance to follow. The contract is formed by the exchange of promises. For example,if John promised to pay Sally $50 in exchange for her promise to go to the grocery for him,this would be an offer for a bilateral contract.

Unilateral contract; an offer that promises something in exchange for performance of some act is an offer to enter into a unilateral contract. For example,if John promises to pay Sal­ly $50 if Sally goes to the grocery for him,this is an offer for a unilateral contract. The offer contemplates acceptance by performance, and the contract is formed when performance is com­plete. A reward is generally an offer for a unilateral contract.

 

Duration of an offer

 

An offer terminates at the end of the time stated in the offer,and an attempted acceptance after that time is merely a counter offer. If no time is stated in the offer,it will lapse after a rea­sonable time. The duration of a reasonable time is a question of fact, dependent upon the nature of the contract, business usages, and other circumstances of which the offeree either knows or should knows.

 

 Lapse of Offer

 

The offer remains open or valid until it is terminated in one of the following ways;

 

By revocation; revocation of offer means withdrawal of the offer and it will only be effec­tive if it is communicated to the offeree before he accepts the offer.

 

As a general rule,an offer is not binding on the offeree. If the offeree does not accept it,he has no obligation to give a notice to the offeror. Whether or not an offer is binding on the offeror is rather complex. In common law, an offer generally is not binding on the offeror, due to the lack of consideration not being signed and sealed, and the offereror can withdraw the offer at any time before the offree’s acceptance. In English law,a promise to keep an offer open for a fixed period does not prevent its revocation within that period unless the offeree buys an option to keep the offer open for a fixed period.

 

Obviously, the above stipulation doesn’t meet the development of modem economic life. UCC( Uniform of Commercial Code) has improved this and holds that an offer can’t be revoked if (i) the offeror is merchant; (ii) it has a period of validity and(.iii) the offer must be in writing and the offer must sign on it. Article 14 of the CISG( United Nations Convention on Contract for the International Sale of Goods) states; (i) Until a contract is concluded an offer may be re­voked if the revocation reaches offeree before he has dispatched an acceptance: (ii) However, an offer can’t be revoked;if it indicates,whether by stating a fixed time for acceptance or other­wise, that it is irrevocable;or if it was reasonable for the offeree to rely on the offer as being ir­revocable and the offeree has acted in reliance on the offer.

 

By rejection by the offeree, that is, by non - acceptance within the time prescribed for acceptance by the offeror.

 

Seller mails a letter to Buyer in which he offers to sell him Blackacre for $ 10000, the offer to remain open for two weeks. Three days after receiving this offer,Buyer writes a letter to Seller informing him that he rejects it. Later Buyer writes a second letter to Seller stating that he has changed his mind and that he now accepts the offer. This letter reached Seller well within the period set for acceptance^ Is Seller bound? It is generally assumed that a definite rejection once communicated extinguishes the offeree’s power of acceptance, so that no contract would result on the facts stated. See Akers v. J. B. Sedberry, Inc. , supra. In one of the few discussions of the possible rationale of this rule it is said," The real reason why a rejection ... should terminate the power to accept seems to be the effect that [ it] will probably have upon the thought and ac­tions of the offeror. " Corbin, Offer and Acceptance and Some of the Resulting Legal Relations, 1917,26 Yale L.J. 169,197.

 

By counter - offer, an acceptance is not a valid one and constitutes a new offer and a counter - offer if it contains additions or reductions or amendment to the offer, which may be accepted by the original offeror.

By lapse of time; an offer will expire after the expiration of a fixed time limit if it has been specified, if an offer doesn’t express any provision limiting its duration, it will lapse after a reasonable time. What is a reasonable time will depend on the nature of the offer and the cir­cumstances of the case.

By death of either party;an offer lapse on the death either of the offeror or the offeree before acceptance. Death after acceptance does not affect the obligations arising from a contract unless they are of a personal nature.

 

Restatement Second §48 provides that" An offeree’s power of acceptance is terminated when the offeree or offeror dies or is deprived of legal capacity to enter into the proposed con­tract. " According to this Section, the offeror’s death or incapacity extinguishes the offeree’s pow­er to create a contract by acceptance even though the offeree did not know of the death or inca­pacity at the time he accepted.

 

Where the proposed contract is of such a nature that it would itself be dissolved by the death or incapacity of one of the parties after it was entered into, it is, of course, unnecessary to inquire whether the death or incapacity of the offeror revoked the offer. For example,a contract of personal employment is normally regarded as dissolved by the death of either the employer or employee. It would therefore be pointless to insist that an offer of employment survived the death of the offeror, since the contract itself would be incapable of surviving that contingency. The problem of the continued existence of the offeree’s power of acceptance does,however,be­come material in cases where the proposed contract, if once validly concluded, would survive the death or incapacity of a party.

 

By failure of a condition subject to which the offer was made. If the offer was made sub­ject to a condition and that condition is not fulfilled, the offer is incapable of acceptance.

 

 

AKERS v. J. B. SEDBERRY, INC.

 

Court of Appeals of Tennessee, 1955

 

39 Tenn. App. 633,286 S. W. 2d 617, cert, denied by Tenn. S. Ct.

 

FEITS. JUDGE. These two consolidated causes are before us upon a writ of error sued out by J. B. Sedberry, Inc. ,and Mrs. M. B. Sedberry, defendants below, to review a decree of the Chancery Courts, awarding a recovery against them in favor of each of the complaints, Charles William Akers and William Gambill Whitsitt,for damages for breach of a contract of employ­ment.

 

J. B. Sedberry, Inc. , was Tennessee Corporation with its principal place of business at Franklin,Tennessee. Mrs. M. B. Sedberry owned practically all of its stock and was its president and in active charge of its affairs. It was engaged in the business of distributing" Jay Bee" hammer mills,which were manufactured for it under contract by Jay Bee Manufacturing Compa­ny , a Texas corporation, whose plant was in Tyler, Texas, and whose capital stock was owned principally by L. M. Glasgow and B. G. Byars.

 

On July 1,1947, J. B. Sedberry, Inc. , by written contract, employed complaint Akers as Chief Engineer for a term of five years at a salary of $ 12,000 per year,payable $ 1,000 per month,plus 1% of its net profits for the first year, 2% the second, 3% the third, 4% the fourth,and 5% the fifth year. His duties were to carry on research for his employer,and to see that the Jay Bee Manufacturing Company, Tyler, Texas, manufactured the mills and parts ac­cording to proper specifications. Mrs. M. B. Sedberry guaranteed the employer’s performance of this contract.

 

On August 1,1947,J. B. Sedbery,Inc. ,by written contract,employed complainant Whitsitt as Assistant Chief Engineer for a term of five years at a salary of $7,000 per year,payable $600 per month,plus 1% of the corporation’s net profits for the first year,2% for the second, 3% for the third,4% for the fourth,and 5% for the fifth year. His duties were to assist in the work done by the Chief Engineer. Mrs. M. B. Sedberry guaranteed the employer’s performance of this contract.

 

Under Mrs. Sedberry’s instructions, Akers and Whitsitt moved to Tyler,Texas,began per­forming their contract duties in the plant of the. Jay Bee Manufacturing Company, continued working there, and were paid under the contracts until October 1, 1950, when they ceased work,under circumstances hereafter stated.

 

[After the employment contracts were made,Mrs. Sedberry acquired the stock of Jay Bee from Glasgow and Byars,and installed a new manager,A. M. Sorenson. ] There soon developed considerable friction between Soreson and complainants Akers and Whitsitt. The Jay Bee Manu­facturing Company owed large sums to the Tyler State Bank & Trust Co. ; and the bank’s of­ficers , fearing the company might fail under Sorenson’s management, began talking to Akers and

 

Whitsitt about the company’s financial difficulties.

 

While these matters were pending, Akers and Whitsitt flew to Nashville and went to Frank­lin to talk with Mrs. Sedberry about them. They had a conference with her at her office on Fri­day, September 29,1950, lasting from 9:30 a. m. until 4:30 p. m. As they had come unan­nounced and unknown to Sorenson,they felt Mrs. Sedberry might mistrust them;and at the out­set to show their good faith, they offered to resign, but she did not accept their offer. Instead, she proceeded with them in discussing the operation and refinancing of the business.

 

Testifying about this conference, Akers said that, at the very beginning, to show their good faith, he told Mrs. Sedberry that they would offer their resignations on a ninety - day notice, pro­vided they were paid according to the contract for that period; that she pushed the offers a- side—"would not accept them" ,but went into a full discussion of the business;that nothing was thereafter said about the offers to resign; and that they spent the whole day discussing the business, Akers making notes of things she instructed him to do when he got back to Texas.

 

Whitsitt testified that--- [ Mrs. Sedberry].... did not accept the offer,but proceeded with the business, and nothing further was said about resigning.

 

Mrs. Sedberry testified that Akers and Whitsitt came in and" offered their resignations" ; that they said they could not work with Soreson and did not believe the bank would go along with him;and that" they said if it would be of any help to the organization they would be glad to tender their resignation and pay them what was due them. " She further said that she" did not accept the resignation" ,that she "felt it necessary to contact Mr. Soreson and give consideration to the resignation offer. " But she said nothing to complainants about taking the offer under res­ignation.

 

On cross - examination she said that in the offer to resign" no mention was made of any ninety - day notice. " Asked what response she made to the offer she said," I treated it rather casually because I had to give it some thought and had to contact Mr. Soreson. " She further said she excused herself from the conference with complainants,went to another room,tried to tele­phone Soreson on Tyler,Texas,but was unable to locate him.

 

She then resumed the conference, nothing further was about the offers to resign, nothing was said by her to indicate that she thought the offers were left open or help under consideration by her. But the discussion proceeded as if the offers had not been made. She discussed with complainants future plans for refinancing and operating the business, giving them instructions, and Akers making notes of them.

 

Following the conference,complainants,upon Mrs. Sedberry’s request,flew back to Texas to proceed to carry out her instructions.

 

On Monday, October 2,1950, Mrs. Sedberry sent to complainants similar telegrams, signed by" J. B. Sedberry, Inc. ,by M. B. Sedberry, President," stating that their resignation were ac­cepted,effective immediately. We quote the telegram to Akers,omitting the formal parts;

 

" Account present unsettled conditions which you so fully are aware we accept your kind of resignation effective immediately. Please discontinues as of today with anyone employed in Sed­berry, Inc. , Engineering Department, discontinuing all expenses in this department writing."

 

While this said she was"writing,"she did not write.

 

[ Akers then wrote ] that he was amazed to get her telegram, and called her attention to the fact that no offer to resign by him was open or outstanding when she sent the telegram; that while he had made a conditional offer to resign at their conference on September 29, she had immediately rejected the offer,and had discussed plans for the business and instructed him and Whitsitt as to things she wanted them to do in the Business on their return to Tyler.

 

The letter further stated that Akers was expecting to be paid according to the terms of his contract until he could find other employment that would pay him as much income as that pro­vided in his contract,and that if he had to accept a position with less income,he would except to be paid the difference, or whatever losses he suffered by her breach of the contract. [ Whitsitt wrote a similar letter. ]. . . .

 

As it takes two make a contract,it takes two unmake it. It cannot be changed or ended by one alone,but only by mutual assent of both parties. A contract of employment for a fixed period may be terminated by the employee’s offer to resign, provided such offer is duty accepted by the employer'

 

An employee’s tender of his resignation, being a mere offer is, of course, not binding until it has been accepted by the employer. Such offer must be accepted according to its terms and within the time fixed. The matter is governed by the same rules as govern the formation of con­tracts. ...

 

An offer may be terminated in a number of ways, as for example, where it is rejected by the offeree,or where it is not accepted by him within the time fixed,or,if no time is fixed,within a reasonable time. An offer terminated in either of those ways causes to exist and cannot thereafter be accepted.

 

The question what is a reasonable time, where no time is fixed, is a question of fact, depen­ding on the nature of the contract proposed, the usages of business and other circumstances of the case. Ordinarily, an offer made by one to another in a face conversation is deemed to contin­ue only to the close of their conversation, and cannot be accepted thereafter.

 

The rule is illustrated by Restatement Contracts § 40, Illustration 2, as follows;

 

"While A and B are engaged in conversation,A makes B an offer to which B then makes no reply, but a few hours later meeting A again, B states that he accepts the offer. There is no contract unless the offer or the surrounding circumstances indicate that the offer is untended to continue beyond the immediate conversation. " •••

 

" When two negotiating parties are in each other’s presence, and one makes an offer to the

 

 

other without indicating any time for acceptance, the inference that will ordinarily be drawn by the party is that an answer is expected at once... . If,when the first reply is not an acceptance, the offer turns away in silence, the proper inference is that the offer is no longer open to accept­ance. "

 

The only reply by Akers and Whitsitt to resign was the offer made by them in their conver­sation with Mrs. Sedberry. They made that offer at the outset,and on the evidence it seems clear that they expected an answer at once. Certainly, there is nothing in the evidence to show that they intended the offer to continue beyond that conversation; and on the above authorities, we think the offer did not continue beyond that meeting.

 

Indeed,it did not last that long,in our opinion,but was terminated by Mrs. Sedberry’s re­jection of it very early in that meeting. While she did not expressly reject it, and while she may have intended, as she says, to take the offer under consideration, she did not disclose such in­tent to complainants;but,by her conduct,led them to believe she rejected the offer,brushed it aside,and proceeded with the discussion as if it had not been made.

 

" An offer is rejected when the offer is justified in inferring from the words or conduct of the offeree that the offeree intends not to accept the offer or to take it under further advisement (Rest. Contract sec. 36). "

 

So, we argue with the trial Judge that when defendants sent the telegrams, undertaking to accept offers of complainants to resign, there was no such offer in existence; and that this at­tempt of defendants to terminate their contract was unlawful and constituted a breach for which they are liable to complainants.

 

Finally,defendants contend that if complainants are entitled to any recovery at all,such re­covery should have been limited to the ninety - day period from and after October 2,1950,be­cause complainants themselves admitted that they had offered to resign upon ninety days notice with pay for that period.

 

The answer to this contention is that their offer to resign on ninety days notice was not ac­cepted, but had terminated, and there was no offer in existence when Mrs. Sedberry undertook to accept their offers of resignation. Such attempts by defendants to terminate their contract were unlawful and were a breach for which they become liable for the measure of recovery as above stated.

 

All of the assignments of error are overruled and the decree of the Chancellor is affirmed.

 

The causes are remanded to the Chancery Court for further proceedings not inconsistent with this opinion.

 

HICKERSON and SHRIVER JJ. , concur.

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