13.1 Governing Law, Offers & Termination of the Power of Acceptance

13.1 Governing Law, Offers & Termination of the Power of Acceptance

NCBE's Contracts outline begins with formation: mutual assent (offer and acceptance), indefiniteness, and consideration. This section covers the offer and how the offeree's power of acceptance ends. Acceptance and the battle of the forms are covered in Section 13.2, and consideration in Section 13.3.

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1. Applicable Law: Common Law vs. UCC Article 2

The American legal system operates under two distinct legal regimes for contracts: the State Common Law (developed through judicial decisions and synthesized in the Restatements of Contracts) and the Uniform Commercial Code (UCC) Article 2 (codified statutory law governing the sale of goods).

                        ┌───────────────────────────────┐
                        │ What is the Subject Matter?   │
                        └───────────────┬───────────────┘
                                        │
                ┌───────────────────────┴───────────────────────┐
                ▼                                               ▼
      ┌──────────────────┐                            ┌──────────────────┐
      │  Sale of Goods   │                            │ Services, Land,  │
      │ (Movable Items)  │                            │ Employment, IP   │
      └────────┬─────────┘                            └────────┬─────────┘
               │                                               │
               ▼                                               ▼
      ┌──────────────────┐                            ┌──────────────────┐
      │   UCC Article 2  │                            │    Common Law    │
      │  (Statutory Code)│                            │ (Case Precedent) │
      └──────────────────┘                            └──────────────────┘

A. Scope of Common Law

Common law applies to all contracts that do not involve the sale of goods. This includes:

• Real Property Transactions: Contracts for the sale, purchase, lease, or mortgaging of land and interests in land.
• Services: Employment agreements, consulting agreements, professional services (legal, medical, architectural), and repair services.
• Construction Contracts: Agreements to build structures or make capital improvements to land.
• Intangible Property & Intellectual Property: Sales or licensing of patents, copyrights, trademarks, stock shares, commercial paper, and assignments of accounts receivable.

B. Scope of UCC Article 2: Transactions in Goods

Under UCC § 2-102, Article 2 governs "transactions in goods." Under UCC § 2-105(1), goods are defined as:

• All things (including specially manufactured goods) that are movable at the time of identification to the contract for sale.
• Goods include unborn young of animals, growing crops, timber to be cut, and extracted minerals or structures to be severed by the seller.
• Goods do not include money used as payment, investment securities (governed by UCC Article 8), or things in action (causes of action or intangible debts).

C. The UCC "Merchant" Standard

While UCC Article 2 applies to any sale of goods—even between two private consumers selling a used bicycle—certain specialized provisions apply only when one or both parties are merchants.

Under UCC § 2-104(1), a merchant is defined as:

1. A person who deals in goods of the kind involved in the transaction (e.g., a car dealership selling automobiles, a jeweler selling diamonds); OR
2. A person who by occupation holds themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction; OR
3. An entity that employs an agent, broker, or other intermediary who holds themselves out as having such knowledge or skill.

MBE Distinction: For commercial practice rules—such as the Firm Offer Rule (§ 2-205), the Merchant's Confirmatory Memo (§ 2-201(2)), and the Battle of the Forms (§ 2-207(2))—almost any business person acting in their commercial capacity qualifies as a merchant. However, for the Implied Warranty of Merchantability (§ 2-314), a merchant is strictly limited to one who deals in goods of the kind sold.

D. Hybrid (Mixed) Contracts: The Predominant Purpose Test

When a single transaction involves both the sale of goods and the provision of services or real estate (e.g., a contract to purchase custom software with on-site installation, or an agreement to paint a house where the contractor supplies paint), courts apply the Predominant Purpose Test.

Under this test, the entire contract is governed by either the Common Law or UCC Article 2 as an all-or-nothing proposition based on the primary thrust of the transaction. Courts evaluate three primary factors:

1. Contractual Language: How the agreement characterizes the transaction (e.g., "purchase order," "buyer/seller" vs. "retainer," "service agreement," "client").
2. Nature of the Supplier's Business: Whether the supplier is primarily a manufacturer/retailer or a service professional.
3. Relative Intrinsic Value: The allocation of the contract price between physical materials and labor/service costs.

Exception: If the contract expressly divides payments and performance into two completely independent, severable obligations—one for goods and one for services—a court may apply Article 2 to the goods portion and Common Law to the services portion.

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2. Mutual Assent & The Objective Theory of Contract Formation

Contract formation requires mutual assent, classically expressed as an offer followed by an acceptance. Under the Objective Theory of Contracts, mutual assent is determined by the outward, objective manifestations of the parties—their spoken words, written text, and overt actions—rather than their unexpressed, subjective intentions.

• Lucy v. Zehmer (1954): The defendant claimed he was intoxicated and merely joking when he signed a contract on a restaurant receipt to sell his farm. The Supreme Court of Virginia held that because a reasonable person in the buyer's position would believe the seller's outward actions constituted a genuine business transaction, the contract was binding. Undisclosed subjective reservations, secret jokes, or mental reservations do not prevent contract formation.
• The Reasonable Person Standard: The court asks: Would a reasonable person in the position of the offeree believe that the offeror intended to create a binding legal relationship upon acceptance?

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3. The Offer

Under Restatement (Second) of Contracts § 24, an offer is defined 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 it."

An offer creates a power of acceptance in the offeree.

A. Definiteness of Terms: Common Law vs. UCC

To constitute an offer, a communication must be sufficiently definite in its terms so that a court can determine what promises were made and fashion an appropriate remedy upon breach.

┌──────────────────────────────────────┬──────────────────────────────────────┐
│         Common Law Doctrine          │         UCC Article 2 Doctrine       │
├──────────────────────────────────────┼──────────────────────────────────────┤
│ Terms must be reasonably certain:    │ Contract forms if parties intended   │
│ 1. Identity of the parties           │ to contract and there is a           │
│ 2. Subject matter                    │ reasonably certain basis for remedy  │
│ 3. Price and quantity (usually)      │ (§ 2-204(3)).                        │
│ 4. Courts may supply a reasonable    │                                      │
│    time and other omitted terms      │ Missing terms supplied by statutory  │
│    (Restatement §§ 33, 204).         │ gap-fillers (§§ 2-305 to 2-309).     │
├──────────────────────────────────────┼──────────────────────────────────────┤
│ Real estate contracts MUST contain:  │ Quantity is MANDATORY (except        │
│ land description + price term.       │ requirements and output contracts).  │
└──────────────────────────────────────┴──────────────────────────────────────┘

UCC Statutory Gap-Fillers

If the parties intend to contract but leave non-quantity terms open, Article 2 fills the gaps:

• Open Price Term (UCC § 2-305): If price is omitted or left to be agreed upon, the price is a reasonable price at the time of delivery.
• Place of Delivery (UCC § 2-308): If unspecified, delivery is at the seller's place of business (or residence if none).
• Time of Performance (UCC § 2-309): Performance is due within a reasonable time.
• Time of Payment (UCC § 2-310): Payment is due at the time and place at which the buyer is to receive the goods.

Requirements and Output Contracts (UCC § 2-306)

A contract is not invalid for lack of a specified quantity if it measures quantity by the buyer's requirements or the seller's output. Under UCC § 2-306(1):

• The quantity must be measured in good faith.
• No quantity may be demanded or tendered that is unreasonably disproportionate to any stated estimate, or in the absence of an estimate, to normal or otherwise comparable prior output or requirements.
• Example: If a manufacturer normally requires 1,000 widgets annually, a sudden demand for 100,000 widgets to corner the market violates § 2-306.

B. Advertisements and Price Quotations

• General Rule: Catalogs, circulars, advertisements, and price quotes are treated as preliminary invitations to deal (or solicitations for offers), not binding legal offers. The customer's order constitutes the actual offer, which the merchant may accept or decline.
• Exception (Lefkowitz v. Great Minneapolis Surplus Store): An advertisement constitutes a binding offer if it is clear, definite, explicit, and leaves nothing open for negotiation, specifying who can accept, what is offered, and what must be done to accept (e.g., "First customer in line Saturday at 9:00 AM can purchase this 1-carat diamond ring for $1.00").

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4. Termination of the Power of Acceptance

An offer remains alive until terminated. Once terminated, an attempt to accept is legally ineffective and acts merely as a new offer. An offer terminates through five mechanisms:

A. Lapse of Time

• An offer expires at the time specified in the offer. If no deadline is specified, it lapses after a reasonable time under the circumstances (considering market volatility, communication medium, and industry custom).
• In face-to-face or telephone conversations, an offer typically lapses when the conversation ends, absent contrary indication.

B. Death or Incapacity

• The death or adjudicated mental incapacity of either the offeror or the offeree automatically terminates an ordinary offer before acceptance.
• Neither party needs notice of the death or incapacity.
• Crucial Exception: The offeror's death or incapacity does not terminate an option contract, because the option is itself a binding contract (Restatement § 37).

C. Revocation by the Offeror

An offeror may revoke an ordinary offer at any time prior to acceptance. Revocation can be direct or indirect:

• Direct Revocation: Offeror communicates withdrawal directly to the offeree. Revocation is effective upon receipt by the offeree (deposit in the mail does not revoke).
• Indirect Revocation (Dickinson v. Dodds): An offer terminates indirectly when:
  1. The offeror takes definite action inconsistent with an intention to enter into the proposed contract (e.g., sells the subject property to a third party); AND
  2. The offeree acquires reliable information of this inconsistent action from a trustworthy source.

D. Rejection by the Offeree

• An offeree's rejection terminates the power of acceptance. A rejection is effective upon receipt by the offeror.
• Counteroffers: Under Common Law, any response that proposes new terms or materially alters the offer constitutes a counteroffer, which operates as an implied rejection terminating the original offer.
• Mere Inquiry vs. Counteroffer: A mere inquiry or request for clarification does not terminate the offer (e.g., "Would you consider taking $9,500 cash?" is an inquiry leaving the $10,000 offer open; whereas "I reject your price and will pay $9,500" is a counteroffer).

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5. Irrevocable Offers: The Four Exceptions

As a general rule, offers are freely revocable at the will of the offeror, even if the offeror explicitly promises to keep the offer open. The four situations below are the most frequently tested exceptions. In addition, many courts follow Restatement § 87(1)(a) and enforce a signed written option that recites a purported consideration and proposes a fair exchange within a reasonable time, even if the recited consideration was never paid.

                      ┌────────────────────────────────────────┐
                      │       FOUR IRREVOCABLE OFFERS          │
                      └───────────────────┬────────────────────┘
                                          │
     ┌───────────────────┬────────────────┴───────────────────┬───────────────────┐
     ▼                   ▼                                    ▼                   ▼
┌──────────────┐  ┌──────────────┐                     ┌──────────────┐    ┌──────────────┐
│Option Cont.  │  │UCC Firm Offer│                     │ Promissory   │    │Unilateral    │
│ (Common Law) │  │  (§ 2-205)   │                     │  Estoppel    │    │Performance   │
├──────────────┤  ├──────────────┤                     ├──────────────┤    ├──────────────┤
│Requires paid │  │1. Merchant   │                     │Substantial,  │    │Beginning of  │
│consideration │  │2. Signed writ│                     │foreseeable   │    │performance   │
│to keep open  │  │3. Holds open │                     │detrimental   │    │creates option│
│              │  │(Max 3 months)│                     │reliance      │    │(Rest. § 45)  │
└──────────────┘  └──────────────┘                     └──────────────┘    └──────────────┘

1. Option Contract at Common Law

An option contract is an independent contract where the offeror promises to keep an offer open for a specified period in exchange for separate consideration paid or provided by the offeree.

• Without separate consideration, a common law promise to hold an offer open is a mere nudum pactum (naked promise) and remains freely revocable.

2. UCC Firm Offer Rule (§ 2-205)

Under UCC Article 2, a merchant can create an irrevocable offer without consideration. To qualify as a firm offer, three elements must be satisfied:

1. Offer by a Merchant: The offeror must be a merchant.
2. Signed Writing: The offer must be in a writing signed (or authenticated) by the merchant offeror.
3. Express Assurance: The writing must give explicit assurance that the offer will be held open.

Temporal Limits of Firm Offers

• A firm offer is irrevocable for the time stated in the writing.
• If no time is stated, it remains irrevocable for a reasonable time.
• In no event may the period of irrevocability exceed three months.
• If a merchant promises to keep an offer open for six months without consideration, the offer is irrevocable for three months; after three months, the offeror may revoke at will (unless independent consideration was paid).
• Offeree-Supplied Forms: If the firm offer clause is contained on a form provided by the offeree, the clause must be separately signed or initialed by the offeror.

3. Detrimental Reliance / Promissory Estoppel (Restatement § 87(2))

An offer becomes irrevocable when the offeror reasonably expects to induce substantial action or forbearance of a definite character by the offeree before acceptance, and the offeree actually relies to its detriment.

• Construction Bidding (Drennan v. Star Paving Co.): When a general contractor prepares an aggregate bid based on a specific subcontractor's quote, the subcontractor's bid is irrevocable until the general contractor is awarded the prime contract and has a reasonable opportunity to accept.

4. Part Performance of a Unilateral Contract (Restatement § 45)

In a unilateral contract, the offeror invites acceptance exclusively by full performance of an act (not by promise).

• Under Restatement § 45, once the offeree begins performance of the requested act, an option contract is created by operation of law.
• The offeror is precluded from revoking the offer for a reasonable time to allow the offeree to complete performance.
• Crucial Nuances:
  • The offeree is not bound to complete performance; the offeree can abandon performance at any time without breach.
  • A contract is not formally formed until the offeree fully completes performance.
  • Mere preparation to perform is not beginning performance (though extensive preparation may trigger promissory estoppel under Restatement § 87(2)).

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More on Offers and Termination

Preliminary Negotiations and Agreements to Agree

• Price quotations and invitations: A price list or quotation is usually an invitation to make offers. A quotation can be an offer if it is detailed, addressed to a particular person, and leaves nothing but acceptance.
• Plans to sign a later writing: If the parties have agreed on all terms and intend to be bound, a plan to sign a formal document later does not prevent a contract from forming. But if either party has reason to know the other does not intend to be bound until the writing is signed, there is no contract yet (Restatement § 27).
• Agreements to agree: A promise to agree on an essential term later is often too indefinite to enforce, unless the parties supplied a method (such as a formula or an independent appraiser) for fixing the term.

Rewards and General Offers

• A person can accept an offer of a reward only if the person knows of the offer when performing; someone who returns a lost dog without knowing a reward was offered has not accepted the offer.
• An offer made to the public by advertisement can be revoked by publicity comparable to that given the offer, even if a particular offeree never sees the revocation (Restatement § 46; Shuey v. United States, 1875).

Additional Termination Rules

• Delayed offers: If an offer arrives late and the offeree knows or should know of the delay, the time for acceptance is not extended; if the offeree has no reason to know of the delay, it is extended (Restatement § 49).
• Counteroffers under advisement: A counteroffer does not terminate the original offer if the offeror has said otherwise or the offeree indicates it is still considering the original offer (Restatement § 39(2)). "Would you take $9,000?" is an inquiry, not a rejection.
• Option contracts: An offeree's rejection or counteroffer during an option period does not end the option, unless the offeror materially changes position in reliance on the rejection (Restatement § 37).
• Supervening events: An offer also ends if, before acceptance, the proposed contract becomes illegal or the specific subject matter is destroyed.