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Reaching Agreement: The Process of Contract Formation

Reaching Agreement: The Process of Contract Formation. C. LIMITING THE OFFEROR’S POWER TO REVOKE: THE EFFECT OF PRE-ACCEPTANCE RELIANCE Under the common law, the offeror may revoke the offer anytime before acceptance by the offeree.

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Reaching Agreement: The Process of Contract Formation

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  1. Reaching Agreement: The Process of Contract Formation • C. LIMITING THE OFFEROR’S POWER TO REVOKE: • THE EFFECT OF PRE-ACCEPTANCE RELIANCE • Under the common law, the offeror may revoke the offer anytime before acceptance by the offeree. • Although this is the common law approach, this rule is not a universally accepted rule regarding the offeror’s power to revoke. Under Article 16 of the Convention on Contracts for the International Sale of Goods: • Until a contract is concluded an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance. • However, an offer cannot 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. • Under the common law, the offer is irrevocable only if consideration is given for the promise not to revoke. • Is, reliance a basis for making the offer irrevocable?

  2. Reaching Agreement: The Process of Contract Formation • C. LIMITING THE OFFEROR’S POWER TO REVOKE: • THE EFFECT OF PRE-ACCEPTANCE RELIANCE • James Baird Co. Gimbel Bros., Inc.. • Drennan v. Star Paving Co. • Berryman v. Kmoch • Under the common law, is consideration necessary to the creation of an option contract? • Is the Restatement (2nd) Contracts consistent with the common law rule regarding the need for consideration as condition to formation of an option contract? • Pop’s Cones, Inc. Resorts International

  3. Reaching Agreement: The Process of Contract Formation • D. IRREVOCABILITY BY STATUTE: THE “FIRM OFFER” • An offer may be irrevocable if the offeror receives consideration from the offeree. • Restatement 2nd ' 87(1) provides additional ways in which an offer may be made irrevocable as an option contract. • The offer may be made irrevocable by statute • The public contracting process where state or federal statutes or regulations provide that the offer is irrevocable for some period. • The UCC has two provisions making offers irrevocable • Under § 2-328(3), once the auctioneer calls for bids on an article and the goods are sold without reserve, the seller may not withdraw the item unless no bids are made with a reasonable time after bids are called. • UCC § 2-205 which outlines under what circumstances an offer is irrevocable. • An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is nor revocable, for lack of consideration, during the time stated of if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

  4. Reaching Agreement: The Process of Contract Formation • QUALIFIED ACCEPTANCE: “THE BATTLE OF FORMS” • Contacts are generally thought to be detailed documents containing the legalese "whereas“ and, "wherefores,“ which found in the recitals portions of a contract • Generally a contract contains • An accurate description of the exchange of performances to which the parties have agreed, • Identification of the principal risk involved for one or both the parties, and • The specification of each parties "rights in the event the risk-event occurs.“ • For many businesses form or prototype contracts are used and are useful. • Form contracts are generally used in a business or industry that engages in a large number of substantially similar transactions. • The only difference between each transaction is the quantity of goods, price of the item sold, the name of the parties, and delivery requirements. • Negotiations on and reaching agreement on other contract terms each time make these routine transaction too costly.

  5. Reaching Agreement: The Process of Contract Formation • QUALIFIED ACCEPTANCE: “THE BATTLE OF FORMS” • To increase the efficiency of the contract formation process with respect to reoccurring transactions, "standard form", pre-printed contacts are utilized. • These documents will have blanks where the name of the parties, quantity of goods sold, price, and deliver requirement will be entered. • The balance of the agreement, often involving several pages, will contain default provisions, remedies, and other matters specific to the particular business or industry. • We have stated over and over again in this course • The rules of classical contract law were fashioned on the assumption that the contract formation process follow the conventional offer-acceptance model. • Under this model, an offer is made, after which the offeree may accept or reject it. • If rejected, the offeree may submit a counteroffer. • The counteroffer will itself be an offer which may be accepted or rejected by the original offeror. This may no be what generally occurs in business toady.

  6. BATTLE OF THE FORMS: CLASSICAL APPROACH Company Purchase of 1000 Laptop Computers Company Submits its Purchase Order Form For Purchase of 1000 Laptop Computers at a Total Price of $400,000 CompUSA Purchase Order Form Includes Consequential Damages Clause, Making Seller Liable for Damages Proximately Caused by Failure to Timely Deliver Goods. Tellex, Inc. Sends Acceptance Form With No Additional Clauses. Is Contract Formed?

  7. BATTLE OF THE FORMS: CLASSICAL APPROACH Company Purchase of 1000 Laptop Computers Company Submits its Purchase Order Form For Purchase of 1000 Laptop Computers at a Total Price of $400,000 CompUSA Purchase Order Form Includes Consequential Damages Clause, Making Seller Liable for Damages Proximately Caused by Failure to Timely Deliver Goods. Tellex, Inc. Sends Acceptance Form With Additional Clauses, Limiting Liability for Late Delivery. Is Contract Formed? Is this a counteroffer? If Tellex, Inc. accepts delivery, what are the contract terms?

  8. BATTLE OF THE FORMS: CLASSICAL APPROACH Company Purchase of 1000 Laptop Computers Company Submits its Purchase Order Acknowledgement Form. CompUSA Purchase Order Acknowledgement Form Includes Consequential Damages Clause, Making Seller Liable for Damages Proximately Caused by Failure to Timely Deliver Goods. If CompUSA accepts delivery, what are the contract terms? Tellex, Inc. Sends Acceptance Form With Additional Clauses, Limiting Liability for Late Delivery. Is Contract Formed? Is this a counteroffer? If Tellex, Inc. accepts delivery, what are the contract terms?

  9. BATTLE OF THE FORMS: UCC 2-207 Company Purchase of 1000 Laptop Computers Company Submits its Purchase Order Form For Purchase of 1000 Laptop Computers at a Total Price of $400,000 CompUSA Purchase Order Form Includes Consequential Damages Clause, Making Seller Liable for Damages Proximately Caused by Failure to Timely Deliver Goods. Tellex, Inc. Sends Acceptance Form With New Delivery Term. No Delivery Term in offer. Is Contract Formed?

  10. Reaching Agreement: The Process of Contract Formation • QUALIFIED ACCEPTANCE: “THE BATTLE OF FORMS” THE BATTLE OF FORMS CONTRACT FORMATION UNDER UCC 2-207 WHEN ACCEPTANCE VARIES TERMSOF THE OFFER

  11. Reaching Agreement: The Process of Contract Formation • QUALIFIED ACCEPTANCE: “THE BATTLE OF FORMS” • Section 2-207(1) of the UCC • ANSWERS THE FOLLOWING QUESTION: • IS A CONTRACT FORMED WHEN OFFEREE’S ACCEPTANCE CONTAINS TERMS THAT DIFFER FROM THE TERMS OF THE OFFER? • That provision provides • A definite and seasonal 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.

  12. Reaching Agreement: The Process of Contract Formation • QUALIFIED ACCEPTANCE: “THE BATTLE OF FORMS” BUYER FORWARDS ORDER FORM W CONSEQUENTIAL DAMAGES PROVISION SELLER SENDS ACCEPTANCE FORM W/ NEW DELIVERY PROVISION YOUHAVE A CONTACT

  13. WHAT HAPPENDS TO ADDITIONAL OR DIFFERENT TERMS? THE ANSWER MAY BE FOUND IN UCC 2-207(2)

  14. UNDER UCC 2-207(2) If the parties are not merchants, The Additional Terms are construed as PROPOSALS FOR ADDITIONS TO THE CONTRACT. The offerror may agree to modify the contract by accepting the new terms.

  15. UNDER UCC 2-207(2) If the parties are merchants, The Additional Terms becomes A PART OF THE CONTRACT UNLESS CERTAIN THINGS OCCUR

  16. IF ANY THE FOLLOWING EVENTS OCCUR, THE ADDITIONAL TERM WILL NOT BECOME A PART OF THE CONTRACT (1) THE OFFER EXPRESSLY LIMITS ACCEPTANCE TO THE TERMS OF THE OFFER

  17. (2) THE ADDITIONAL TERMS MATERIALLY ALTERS THE CONTRACT

  18. (3) NOTIFICATION OF OBJECTION ALREADY GIVEN OR IS GIVEN WITHING REASONABLE TIME AFTER NOTICE OF THEM RECIEVED

  19. HOW WOULD THE OFFEROR PREVENT DEFAULT ADDITION OF NEW TERMS? • According to the second part of 2-207(1), the offeree must make acceptance is expressly made conditional on assent to the additional or different terms. BUYER FORWARDS ORDER FORM W CONSEQUENTIAL DAMAGES PROVISION SELLER SENDS ACCEPTANCE FORM W/ NEW DELIVERY PROVISION IN ADDITION, OFFEREE IN AFFECT SAYS THAT MY ACCEPTANCE IS CONDITIONAL ON YOUR (OFFEROR’S) ASSENT TO ADDITIONAL TERM. WHAT IS THE EFFECT OF THIS LANGUAGE ON THE CONTRACT FORMATION PROCESS?

  20. BATTLE OF THE FORMS: UCC 2-207 WHAT IF OFFEREE MAKES ACCEPTANCE CONDITIONAL ON OFFEROR ASSENTING TO THE ADDITIONAL TERM AND THE PARTIES PERFORM IN SPITE OF THIS PROVISION? • Section 2-207(3) of the UCC THEN CONTROLS • That provision provides • 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 consists of those terms on which the writings agree, together with any supplementary terms incorporated under any other provision of this Act.

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