United States Contract Law - Formation - Agreement

Agreement

Mutual assent is also known as ratification and meeting of the minds is typically established through the process of offer and acceptance. However, contracts can also be implied in fact, as discussed below. At common law, the terms of a purported acceptance must be the "mirror image" of the terms of the offer. Any variation thereof constitutes a counteroffer.

An offer is a display of willingness by a promissor to be legally bound by terms he specifies, made in a way that would lead a reasonable person in the promisee's position to understand that an acceptance is being sought and, if made, results in an enforceable contract. Ordinarily, an offeror is permitted to revoke his offer at any time prior to a valid acceptance. This is partially due to the maxim that an offeror is the "master of his offer."

In the case of options, the general rule stated above applies even when the offeror promises to hold the offer open for a certain period of time. For example, Alice says to Bob, "I'll sell you my watch for $10, and you can have a week to decide." Alice is free to revoke her offer during the week, as long as Bob has not accepted the offer.

However, if the offeree gives some separate consideration (discussed below) to keep the offer open for a certain period of time, the offeror is not permitted to revoke during that period. For example, Alice offers to sell Bob her watch for $10. Bob gives Alice $1 to keep the offer open for a week. Alice is not permitted to revoke during the week.

A counteroffer is a new offer that varies the terms of the original offer. Therefore, it is simultaneously a rejection of the original offer. For example, Alan says to Betty, "I'll sell you my watch for $10." At this point Betty has the power of acceptance. But Betty responds, "I'll only pay $8." Betty's response is a rejection of Alan's offer but gives Alan a new power of acceptance. It is possible to phrase what appears to be a counteroffer so that it does not destroy the original power of acceptance. For example, Alan says to Betty, "I'll sell you my watch for $10." Betty responds, "I wonder whether you would take $8." Betty retains her original power of acceptance (unless Alan revokes), but she does not give Alan a new power of acceptance, as she is not making an offer of her own. Therefore, she is not making a counteroffer either. As such, mere inquiries are not counteroffers.

An acceptance is an agreement, by express act or implied from conduct, to the terms of an offer, including the prescribed manner of acceptance, so that an enforceable contract is formed. In what is known as a battle of the forms, when the process of offer and acceptance is not followed, it is still possible to have an enforceable contract, as mentioned above with respect to contracts implied in fact.

The Uniform Commercial Code ("UCC") dispenses with the mirror image rule in § 2-207. UCC § 2-207(1) provides that a "definite and seasonable expression of acceptance...operates as" an acceptance, even though it varies the terms of the original offer. Such an expression is typically interpreted as an acceptance when it purports to accept and agrees on the following terms of the original offer: subject matter, quantity, and price. However, such an expression is not interpreted as an acceptance if it is "expressly conditional" on the original offeror's assent to the varied terms, discussed below. This language is known as the proviso. When the proviso is not used, the terms of the contract are determined by subsection 2. When the proviso is used, but there is no assent by the original offeror to the offeree's varied terms, yet the parties go ahead and perform (act like they have a contract, hence a contract implied in fact), the terms of the contract are determined by subsection 3. So, the terms of a contract under 2-207 are never determined by a combination of subsections 2 and 3.

UCC § 2-207(2) of the statute tells what to do with additional terms. It does not explicitly address what to do with different terms. A minority of states, led by California, infer that this was a typographical error by the drafters. As such, those states treat different terms in the same manner as additional terms. The majority rule, however, is that different terms do not become part of the contract; rather, both of the conflicting terms--from both parties--are removed from the contract. This is known as the knockout rule. Any "gaps" resulting from the removal of these terms are "filled" by Article 2's "gap-fillers."

A term in a purported acceptance is different if it directly contradicts the subject matter of a term present in the original offer. A term in a purported acceptance is additional if it contemplates a subject matter not present at all in the original offer. As already mentioned, subsection 2 does tell what to do with additional terms. They do not become part of the contract if either party is not a merchant.

A merchant is defined elsewhere in the UCC as a party that regularly "deals in goods of the kind" or otherwise gives an impression of knowledge or skill regarding the subject matter of the transaction. If both parties are merchants then additional terms in a purported acceptance do become part of the contract unless any of three exceptions apply.

The exceptions are (out of order): objection by the original offeror in advance; objection by the original offeror within a reasonable time after notice; and material alteration of the contract. The third exception, whether the additional terms materially alter the contract, is the most difficult to apply. Typically, to show it, the merchant must be subjected to undue hardship and/or surprise as a result of the varied term, as measured by the industry involved. It is well established that disclaimer of warranty, indemnification, and arbitration are all clauses that do constitute material alterations.

UCC § 2-207(3) only applies when the proviso language from subsection 1 is used. When the proviso is used, there is no contract formed at that time unless the original offeror assents to the terms that the party purporting to accept has made "expressly conditional."

For example, a buyer sends a purchase order with its own terms. The seller sends an acknowledgement with additional and/or different terms and uses the proviso. The buyer must accept the seller's additional and/or different terms, or else no contract is formed at that time.

Frequently, however, the buyer in such a situation does not accept the seller's terms, typically through silence, that is, not signing and returning the form to the seller. Subsection 3 is designed to deal with this situation.

When the parties begin to perform the contract, they form a contract implied in fact. The terms of that contract are determined by this subsection. They consist of those terms both forms agree on. Any pertinent term upon the forms do not agree are not part of the contract but instead are supplied by the Code's gap fillers.

Note that whether the parties are merchants is irrelevant for this subsection. However, private parties do not typically send and receive purchase orders or invoices, so in hypotheticals, the parties typically are merchants.

For example, the Brown Company (buyer) sends a purchase order to the Smith Company (seller) for 100 widgets. Brown's terms are silent as to arbitration. Smith sends an acknowledgement, making its acceptance of Brown's offer "expressly conditional" on Brown's assent to Smith's additional term that any dispute arising from the transaction be resolved by arbitration. Brown does not sign and return Smith's form, but Smith goes ahead and fulfills the order. Brown receives the widgets and pays for them. The forms do not agree as to the term of arbitration. Therefore, if a dispute arises, the arbitration clause is not part of the contract. Instead, a UCC gap-filling provision is used. Since the Code does not supply arbitration, Brown is able to avoid Smith's term and bring an action in court.

• Laidlaw v. Organ, 15 U.S. 178 (1817) the seller of tobacco was not entitled to get out of a contract to sell a load at a low price when it transpired that the War of 1812 had ended, and so that prices would rise (because a navy embargo was lifted). Even though the buyer stayed silent about the peace treaty that had just been agreed when he was asked if prices might rise, he was entitled to enforce the contract.
• Pando v. Fernandez, 127 Misc.2d 224 (N.Y. Sup. Ct. 1984) it was held that it was not impossible to prove that a boy had agreed with the winner of $2.8m in a lottery that she would share the winnings with him
• ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) the click of a button accepting a license's terms on software counts as agreement
• Specht v. Netscape, 306 F.3d 17 (2d Cir. 2002) simply clicking a download button does not indicate agreement to the terms of a contract if those terms were not consipicuous
• Seixas v. Woods 2 Cai. R. 48 (N.Y. Sup. Ct. 1804) a contract was binding despite making a mistake