The following discussion describes some of the considerations in framing a contractual offer. In addition to identifying some of the key preventive law considerations in connection with contract formation, this discussion illustrates the types of issue analysis and transactional planning that underlie many types of preventive law practice.

Understanding and Preventing Risks in Offers to Form a Contract
(excerpted from Louis M. Brown, The Preventive Law Handbook (1950))

MAKING AN OFFER

Business negotiations

As young children, we learned a characteristic phenomenon of our society: that transforming raw material into finished product requires a series of transactions in which goods in various stages of manufacture pass from one company or person to another. Underlying each of these transactions, for legal purposes, there usually is a promise made by a seller to deliver goods in exchange for a promise by a buyer to pay for them. Such promises do not just happen. They are the end result in a process called negotiation.

From a legal point of view, persons negotiate to obtain an enforceable contract. From a business point of view, businessmen negotiate to accomplish an exchange of commodities, services, or some other thing of value for money, other commodities, or other services.

Businessmen and lawyers look at the negotiation from different points of view. To a lawyer, his primary function in negotiating is to arrive at a legally enforceable contract. To a businessman, the purpose of negotiation is to get the goods or services he wants in exchange for his promise to pay what he stipulates. If, as so frequently happens, the businessman gets and gives what he expects, little or no attention is given to the law involved. But businessmen know that sometimes their expectations are frustrated; they do not get what they want or are asked to give more than they expect. The buyer sometimes does not receive what he ordered; the seller occasionally does not get his price for the goods he delivered. When businessmen are disappointed they think of methods to get what they want. The legal remedy is one of those methods; frequently, it is the only available method. The lawyer looks at the legal remedy as the basic method because in our society legal recourse is the basic means available to enforce a businessman's expectations. Businessmen also know that law is the fundamental basis for the enforcement of promises made. They know that one of the ways to get what they expect is to ground their expectations upon a legally enforceable obligation.

Many promises are kept because they are legally enforceable. If there were no legal means to enforce promises, it is easy to imagine that many of the promises made would not be kept. Thus, obtaining a legally enforceable promise is one of the methods that a businessman uses to get the goods or services he wants. In this wise, the businessman's purpose and the lawyer's function blend together in negotiating. The lawyer's function assists the businessman's purpose because a legally enforceable contract enables the businessman to accomplish his business purpose. Negotiation is a warning signal because the ultimate effect of negotiation is to create--or fail to create--a legally enforceable contract.

Offers and Requests for Offers

Legally enforceable promises are made in an atmosphere of business negotiations. Someone who has goods to sell makes known his desire to sell, or someone who wants to purchase goods makes known his desire to buy. These desires are made known by the use of any of the available methods of communication--by newspaper advertising, radio, letter, telegram, word of mouth, or even by sign language. Negotiations of some sort precede the making of a contract. Although the parties may use any method of communication that suits their purse or fancy, we shall see later that in certain situations, for a legally enforceable contract to be achieved, compliance with required formalities is necessary. As these negotiations run their course, they frequently reach a point where the law characterizes the statements of one party (offeror) as an offer, and the reply by the other party (offeree) as an acceptance. Quite often, but by no means always, a person who starts negotiations by expressing a desire to buy or sell, is making an offer. The legal purpose in making an offer is clear. It is to give the other party the opportunity to accept the offer and thereby create a legally enforceable contract.

Negotiations leading up to a contract may be lengthy and involve great expense or they may be of extremely short duration. The preliminaries leading to the sale by a newsboy of a newspaper are so short and simple that they can hardly be dignified as negotiations. Yet, all the elements are present. The newsboy expresses (or shall we say, shouts) a desire to sell. He is offering to sell. The customer announces his desire to buy "The Times." The newsboy delivers the paper to the customer. The customer pays the price. There has been a negotiation, a contract, and its performance.

Negotiations and contracts are not limited to the sale and purchase of goods. Contracts may concern any subject matter--for example, employment, transportation, real estate, financing--for which parties bargain. There are contracts to marry, and after marriage there are contracts between husband and wife concerning their property. Regardless of the subject matter, there is, as a prerequisite to a contract, an offer made by one party and an acceptance by the other.

Thus, if a person desires to initiate negotiations looking to the making of a contract, he can do so by making an offer. But, is every indication of a desire to make a contract an offer? The answer is No. The law makes an important distinction. There is a difference, not always easily recognized, between an offer and request for an offer.

Suppose an owner of an automobile wants to sell it, but he is not quite certain. Before he makes up his mind to sell, he wants to determine the price he can obtain. He can make this determination without making an offer to sell. He can request a buyer to make an offer to buy. Even if the seller intends to make an offer, he is in no way limited in the inquiries he can make prior to the time he makes his offer. He can make inquiry of prospective offerees, or of any other person. Then, it is reasonable to ask, is it not always better for a seller not to make an offer but let the other person make the offer to him? To a large extent this depends on one's bargaining and business position. Someone must make the offer in order to consummate a contract. And sometimes it will be a serious mistake to make, even unwittingly, a request for an offer rather than an offer. Why? Let us explore the legal risks and consequences.

Risks Raised By Offers

An offer gives the offeree the opportunity to accept and thus create a legally enforceable contract. If the offer is accepted properly and within time, a contract comes into existence. Thus, in a sense, the making of an offer subjects the offeror to the legal risk that the offer may be accepted. Upon acceptance, the offeror as well as the offeree is legally bound by the resulting contract. Normally, both parties desire to have a binding contract; otherwise the offeror would not have made the offer nor would the offeree accept. However, in a technical sense, a contract is a risk. It binds the parties to legal obligations.

Request for Offer. The risk factor can be illustrated in other ways. If Smith communicates an offer to Jones, the latter can in his reply accept the offer and thereby create a legally binding contract. Suppose, however, that Smith, thinking that he is sending an offer, actually sends what in law is considered a request for an offer, then Jones's reply does not consummate a contract. The risk to Smith is that he does not obtain an obligation binding on Jones or himself. Incidentally, it should be stated at this point, that Jones's reply under these circumstances would likely be considered an offer by him, which Smith in turn could accept.

The risk to Smith in sending a communication is essentially that of not accomplishing legally what he believes he is accomplishing. The fact that Smith does not know the distinction between an offer and request for offer is probably insignificant.

Ambiguous Offer. If Smith sends an offer which he believes to state all the terms of a proposed contract in language clear to him, but which in fact is subject to a different meaning, then he takes the risk that his communication may not be an offer because of the ambiguity or that it may be an offer that can be accepted so as to bind him in a way he did not originally contemplate. Suppose Smith offers to purchase one ton of material. Jones accepts. Smith believes one ton to equal 2,240 pounds (the long ton); Jones understands one ton to equal 2,000 pounds. The legal result, depending on a number of factors including the custom in the particular industry, may be a contract for 2,000 pounds, a contract for 2,240 pounds, or no contract at all. Thus, in the abstract, there is always the possibility that an offer may have legal consequences an offeror does not contemplate.

Time and Manner of Acceptance. The offer has risks connected with the time and manner of its acceptance. The customary legal risk is that, unless the offer otherwise specifies, it may be accepted within a reasonable time after it is made. The offer may be accepted by the same means of communication as was used in sending it. In most states, the acceptance is effective when deposited with the same means of communication used for the offer. Thus, where Smith sends his offer by mall and says nothing about the time and manner of acceptance, the offeree, Jones, may accept within a reasonable time by depositing an acceptance in the mail, in a stamped and properly addressed envelope. At this point the contract is complete, even though Smith never receives the letter. The risks here can be serious. There is the risk as to the meaning of "a reasonable time." Such a dispute can be resolved in litigation. The judge (or jury, if there is one) determines whether the acceptance was within time. There is no rule of thumb to determine how long a reasonable time is. Hence, Smith may believe a reasonable time is five days; Jones may accept within eight days. Smith may conclude that Jones's acceptance was not within a reasonable time and was therefore no acceptance. However, for legal purposes, a judge or jury may determine that eight days is a reasonable time. Smith, as well as Jones, would then have been bound. Smith's dilemma can be serious. He does not know when he sends his offer or when Jones replies, whether eight days is a reasonable time. If Smith disregards Jones's reply, Smith may breach a contract, subjecting himself to a suit for breach of contract.

Acceptance under these circumstances involves an added risk to Smith because he may not know that Jones has accepted. Unknown acceptance is certainly a risk.

Measures to Minimize Risks

Offers, like many other communications, are frequently made by lay persons. It is rarely possible to have the aid of counsel each time an offer is made. In fact, unless the transaction is complex, it is rarely necessary to have such professional advice. However, inasmuch as an offer gives the offeree the opportunity to accept and thereby create an enforceable contract, it is important to be aware of the fact that a communication may be an offer.

Offer or request for offer

At some stage in a negotiation, one should decide whether he wants to make an offer or only a request for an offer. The difference between an offer and a request for an offer has been explained. It is necessary, though, to know how to make an offer, as distinguished from a request for an offer. In short, if an offer is intended, say so in so many words. If offering to sell an automobile, say "I offer to sell this automobile" and specify the terms of the offer. If, on the other hand, merely a request for an offer is intended, say "This is not an offer. It is a request for an offer."

Specify when and how the offer is to be accepted

A valid offer made by an offeror gives the offeree power to make the offer into an enforceable contract. Therefore, whenever an offer is made, the offeror should be careful to specify all of the important terms in the expected contract. It is also important in making an offer to know how, when, and under what circumstances the offer is to be accepted.

In general, offers may call for one of two kinds of acceptance: acceptance by act or acceptance by promise. The offeror writes, "I'll pay you $150 for making an index for this book. This is an offer for an act. It is called an offer for a unilateral contract--a promise by the offeror for an act or a series of acts by the offeree. Or the offeror writes, "I'll pay you $150 for your promise to make an index." This is an offer for a promise. It is called an offer for a bilateral contract--a promise by the offeror for a promise by the offeree. Generally, confusion will be avoided where the offer states which type of acceptance is expected.

In any event, the offeror will want to know when the offeree has accepted the offer. In making an offer, the offeror can control the time and manner of acceptance. He may include in his offer a statement like the following: "Acceptance of the offer must be in written communication received by the undersigned on or before July 20, 195_."

There is a rule of law which provides that unless the offer otherwise specifies, the offer can be accepted by the same means of communication used in communicating the offer, and if it is so accepted, the contract becomes binding when the offeree sends his acceptance. Thus, if an offer is sent by mail and the offer does not specify how the acceptance is to be communicated, the acceptance becomes effective when the offeree deposits a properly addressed and stamped envelope in the mail--even though the offeror does not then know that a contract has been created. It is possible, therefore, for an offeree to accept an offer and for the contract to come into existence before the offeror knows that he really has an enforceable contract. However, this risk can be minimized if the offer specifies that the acceptance must be received by the offeror on or before a certain date. The offeror will then know when he has a contract. Also, in most situations, he will have the opportunity to withdraw his offer should he change his mind before the acceptance has been received.

There is another important reason for specifying the time within which an offer must be accepted. Unless the time is specified, the offeree has a reasonable time within which to accept. There is no fixed rule of law as to how long a reasonable time is. It may be a day, less than a day, or it may be several weeks, depending upon the facts in each individual instance. Thus, an offer to sell stocks and securities where there is a fast-moving market may be an offer which, unless otherwise specified, will expire within a few hours. On the other hand, an offer to sell an automobile may reasonably be said to continue for a week or two weeks, or maybe even longer. The risk of determining how long an offer remains open can be completely controlled whenever an offeror specifies the time within which his offer may be accepted.

Specify who may accept

The offeror should clearly indicate in making an offer whether it is addressed to a particular individual or to a number of individuals. The offeror may direct the offer to his friend John Smith, at a certain address. If he does so, then John Smith, at that address, is the only person who can accept the offer. Or the offeror may publish the offer in a newspaper in terms that permit anyone to accept the offer. If he does so, then any person may accept the offer. The difference is this: in the first case, the offeror is deciding in advance the precise person with whom he wishes to make a contract; in the second case, the offeror does not know when he makes the offer with whom he will enter into the contract.

Specify the contract terms

Definite Terms. An offer should be made as definite as the offeror can possibly make it. The offer should state not only the price but the time when payment is to be made, how it is to be made, and where it is to be made. For example, an offer to sell the furniture in a house for $300 should also specify when the money is to be paid. The offer should specify, depending on the desires of the offeror, that it is to be paid on delivery of the furniture or within a specified number of days after the delivery, or at some other definite time. If payment is to be made in installments, the offer should specify when each installment is due. If the offer fails to specify the time of payment, then the time of payment may become a matter of dispute between the parties.

The general rule to follow is that whenever an offer concerns anything to be done by either party, the offer should be definite and clear as to what is to be done, when it is to be done, and how it is to be done.

Effect of Default. Sometimes it is advisable to go further in an offer than to specify precisely what is to be done by each party and when. Where promises are broken, the law usually provides the innocent party with a remedy. Sometimes legal remedies are not clearly defined, or they may not be the remedies that the parties really desire. For example, suppose the seller and buyer agree that the seller is to deliver a carload of steel per month to the buyer at an agreed price, and that the seller is to make twelve monthly deliveries in consecutive months. The buyer is to pay for each carload ten days after its receipt. The seller makes delivery of the first two carloads. The buyer pays for them. The seller makes delivery of a third carload. The buyer does not pay. Is the seller obligated to make the delivery of the fourth carload if the buyer has not paid for the third carload? Unfortunately, unless the contract specifies that the seller may refuse to make delivery of the fourth carload, the law will not always satisfactorily give the answer. Thus, it is well to provide in offers (which are to become contracts) not only the promises to be kept by each party but the effect of the failure to keep a promise. In the illustration given, the seller might want to provide that if the buyer falls to make payment when due, then the seller has the option to refuse to make further deliveries.

Illusory offer

It is also important that the offeror obligate himself in his offer to do or pay something if he desires to have the acceptance obligate the offeree. Otherwise, he may find to his surprise that despite the acceptance of what is seemingly an offer there is no enforceable contract. To illustrate: A corporation, acting as an agent for an owner of land, made an offer to reserve a lot for two men, and actually received a down payment of $2,500 from them. However, the paper which the two men signed stated that the owner of the land retained the right to return the down payment at any time before a contract of sale was signed by the two men and approved by the owner. Here were a written paper and a substantial down payment. Yet, when the two men sought the return of the down payment, before the contract of sale had been signed by the owner, the Court said they were entitled to it. The owner of the land had not really offered to do anything. On the contrary, he reserved the right to refund the money and disapprove the contract of sale. Consequently, the two men were not obligated, even though they had gone so far as to make a down payment.

Withdrawing or modifying an offer

Suppose that the offeror, after sending an offer, decides he has made a mistake by sending it. He wants to stop the offer. May he do so? The ordinary offer may be withdrawn by the offeror any time before the offeree accepts it. An offer gives the offeree the power to make a binding contract, but this power, created by the offeror, can be removed by the offeror until the offer has been accepted by the offeree. How may an offer be withdrawn? The safest procedure for an offeror to follow in withdrawing an offer is to notify the offeree of cancellation of the offer before acceptance. Send a telegram to the offeree canceling the offer; or telephone the offeree and tell him the offer is withdrawn; or, preferably, do both. Keep a copy of the telegram and a memorandum of the conversation showing what was communicated and the date and time. The general rule (some states differ) is that the revocation of an offer is effective when the revocation is received by the offeree.

A change in the terms of an offer may be accomplished by the offeror in the same manner as withdrawal. An offeror may decide after he has sent the offer that he desires to modify some of its terms. He may do so until the offeree has accepted.

Options. Some exceptions must be mentioned. Offers can be made legally irrevocable. Such offers are commonly called "options" or "option contracts." For example, a prospective purchaser of land wants to make certain that, until he decides whether or not to buy, the owner will not sell to someone else. He wants an irrevocable offer from the owner. Owners will frequently grant such an offer for a money consideration. The owner grants an option to the buyer. Such a continuing offer may not be revoked or modified solely at the discretion of the owner. Essentially, the owner has already made a contract--a contract not to withdraw or change his offer.

Firm Offers. The law seems to be moving in the direction of making offers irrevocable. Ultimately, for written offers, this may be accomplished by legislation that has been suggested in the proposed Uniform Commercial Code. The thought is that when a businessman makes a "firm" offer in writing he ought to be bound as though he had been paid consideration for the offer. Ordinarily, offerees should be entitled to rely on such offers: they do some acts after receiving an offer; they begin to determine whether to accept or reject; they may spend time and money. Such legislation would not reach a wholly new result in every case. There are now some offers that the courts do not permit the offeror to revoke. An offer for a unilateral contract that has been partly performed is an example. The unilateral offeror watches the offeree prepare a book index, and just before the index is completed writes, "I revoke." Actually, the offer has not been fully accepted, but some (perhaps all) courts will hold that the offeror's revocation is ineffective. The offeree has changed his position in reliance upon the offer, and the offeror should not be permitted to revoke.

Summary

Making an offer is a legally important step. It puts legal consequences in action; it gives the offeree the power to accept and thereby create a contract.

Making an offer is a voluntary act of the offeror. The content of an offer is entirely within the offeror's determination. He can put anything he wants into his offer. He can attach any conditions he likes. But after acceptance of an offer, the offeror can no longer make changes at his sole discretion. He is then bound to a contract. And if the offer does not have all the terms the offeror wants, he is "stuck."

Because offers are legally important, the offeror should consider whether to obtain advice of counsel before sending an offer. Certainly, if consulted beforehand, an attorney can be more effective in securing the kind of legally binding obligation the offeror wants and can help minimize the risk of a legally improvident contract. He cannot undo a binding contract created by acceptance, except in rare instances, and then only after considerable time and expense to his client.

Of course, an offeror need not consult counsel every time he makes an offer. Most offers do not involve sufficient risk to warrant consultations. An offeror must exercise his own judgment as to whether his offer is sufficiently unusual, important, or risky, to warrant the services of counsel. The amount of money involved is a good test to apply. The length of time the contract will last is another test. An offer resulting in a contract that will take a long time to perform might be sufficiently important to warrant obtaining preparatory legal advice.

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Illustrative Cases

COURTEEN SEED CO. v. ABRAHAM

129 Ore. 427, 275 Pac. 684 (1929)

Defendant was a grain dealer and warehouseman. On October 4, 1927, defendant in search of buyers of a carload of red clover seed, wrote plaintiff, a corporation engaged in the wholesale seed business, (enclosing sample) as follows: "Red clover, 50,000 lbs. like sample. I am asking 24 cents per, f.o.b., Amity, Oregon." On October 8, plaintiff wired defendant as follows:

"Special delivery sample received. Your price too high. Wire firm offer, naming absolutely lowest f.o.b."

The defendant wired back on the same day: "I am asking 23 cents per pound for the car of red clover seed from which your sample was taken. No. 1 seed, practically no plantain whatever. Have an offer 22 3/4 per pound, f.o.b. Amity."

Plaintiff's acceptance of the alleged offer reads: "Telegram received. We accept your offer. Ship promptly, route care Milwaukee Road at Omaha."

The plaintiff, thinking he had accepted a valid offer, immediately resold the grain to third parties at a net profit of 4 cents per pound. The defendant refused to deliver and the plaintiff sued for breach of contract, claiming to be damaged in the sum of $2750.

From a judgment in the lower court for plaintiff for $500, defendant appealed.

Brown, J., wrote the opinion, reading in part as follows:

Giving due consideration to every word contained in defendant's telegram to plaintiff, we are not prepared to say that the telegram constituted an express offer to sell. It would be poor reasoning to say that the defendant meant to make the plaintiff an offer when he used this language:

"I am asking 23 cents per pound for the car of red clover."

That does not say: "I offer to you at 23 cents per pound the car of red clover," nor does it say, "I will sell to you the carload of red clover at 23 cents per pound." The writer of the telegram used the word "offer" with reference to some other person when he concluded by saying:

"Have an offer 22 3/4 per pound, f.o.b. Amity."

Each of the words "offer" and "asking" has its meaning; and we cannot assume that the writer of the telegram meant to use these words in the same sense, nor can we eliminate the word "asking" from the writing.

Reversed and remanded, with directions to enter a nonsuit.

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J.B. KLEIN IRON & FOUNDRY CO. v.MIDLAND STEEL & EQUIPMENT CO.

183 Okla. 487, 83 P.2d 157 (1938)

Midland Steel & Equipment Co. sued for $752 for certain steel furnished on an open account. J.B. Klein Iron & Foundry Co. apparently acknowledged the $752 obligation but alleged that Midland Steel & Equipment Co. breached a contract for the sale of metal decking to Klein.

On June 1, 1935, Klein wrote Midland as follows:

"In connection with metal deck, if you still have deck available in length 8'2" or 10'2", we would be able to use 50 tons of this."

On June 3, after a long-distance telephone conversation, Midland mailed to Klein a written confirmation of sale, setting forth all the terms as follows:

"Confirmation of Sale

Midland Steel and Equipment Company
400-406 South Clinton Street
Chicago.

June 3, 1935.

No. 2260

Name J.B. Klein Iron & Foundry Co.
Address Oklahoma City, Oklahoma

This confirms sale made to Mr. R. W. Robberson

Weights 18 to 20 gauge steel decking,
Description Approximately 50 tons. 10'2" & 8'2" long.
Price Twenty-five ($25.00) Dollars per net ton.
F.O.B. Cars Chicago, Illinois.
Terms ½ of 1% 10-30 days net.

Shipment to be made

In 30 days to: J.B. Klein Iron & Foundry Co.
Oklahoma City, Okla. Ft. Smith & Western R.R. Delivery

Remarks

(Describe Material in your Bill of Lading as) Per telephone arrangements with Mr. R. W. Robberson. Preference shipment containing all 10'2" lengths. We prefer your inspection prior to shipment. Will advise when ready. . . .

Midland Steel & Equipment Co.
By W. G. Weiss."

On June 8, 1935, Klein wrote Midland relative to other matters, and concluded as follows:

"On the decking, the 10'2" is the most desirable length to us. We wired you that we could use up to 25% of the 8'2" but we would want not more than 25%. Our preference would be about 15% of the 8'2"."

On June 12, Midland replied:

"Regarding the decking, there will be some delay in preparing the decking for shipment and also there is some question as to the lengths all being 10'2" as indicated in your letter. We will give you all of the 10'2" length that we have and not to exceed 25% of the 8'2" lengths."

Midland wrote to Klein on July 22 asking for plaintiff's order and again on July 24 concerning the lengths of decking desired and stating that upon receipt of a reply they would arrange to complete the order. Then on July 31 Midland phoned Klein saying that they were canceling the order. The court held that on the facts it would not be held that there was any offer, or acceptance, but that all the evidence tended to show was a series of negotiations, leading up to an offer but that no definite offer had been made.

Corn, J., wrote the opinion, reading in part as follows:

When it is sought to establish a contract by letters and telegrams which pass between the parties, containing proposals, answers, and counter proposals, it must be made to appear that at some point in the correspondence there was a definite and unqualified proposal by one party which was unconditionally and without qualification accepted by the other party. . . .

It is evident that throughout all these negotiations the parties never met in complete agreement as to the merchandise to be purchased, the kind most acceptable, the amount of each length to be shipped, nor the matter of inspection. . . .

At no point in the negotiations does it appear that defendant [Klein] so firmly bound itself to take any certain amount or kind of this decking so that it would have become liable to respond to the plaintiff [Midland] for damages for a breach of the agreement in case of a refusal on its part to accept delivery, had it been made. It is a cardinal principle of law that a contract must be as binding upon one party as upon the other party thereto.