Maya and nick enter into a contract. to be enforceable, the contract must include

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CHAPTER 4: Offer, Acceptance, and Consideration

CHAPTER 5: Contracts: Capacity, Genuine Assent, the Statute of Frauds, and Illegality

CHAPTER 6: Third Parties, Performance and Discharge of Contracts, and Remedies

Unit II Contracts

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Contract law is of great importance in business and in everyday life. Common trans-actions such as buying a pack of gum at the corner grocery store, purchasing a ticket at a movie theater, or ordering a meal at a restaurant involve making contracts, but so does a complex patent licensing agreement between two multinational corporations. In this unit, we will explore the nature of contracts, the requirements for their valid formation, and the consequences for their breach.

A contract is a legally enforceable agreement between two or more people. Although all contracts contain enforceable promises, not all promises result in contracts. Consider the following situation:

Henry invites Ericka to dinner, and Ericka accepts. Henry looks forward to the date and can think of little else all day long. A half hour before they were to meet, Ericka calls Henry and tells him that she will not be able to keep their date because Ron has invited her to go danc- ing and she has accepted. Henry is upset, hurt, and angry and would like to sue Ericka for breach of contract, since she has clearly broken a promise made to him earlier that day and caused him distress. Will he succeed?

Ericka may not be a very nice person, and she may have had a moral obligation to attend the dinner date. Nevertheless, she had no legal obligation to do so. The agreement that she breached was not a contract, but merely a social obligation that the courts will not enforce.

In order for there to be a valid contract, certain essential elements must exist. These include an offer to enter into a contract, acceptance of the offer by the other party, an exchange of consideration between the parties, and a legal purpose for the contract. In addition, both parties must have the capacity to enter into a contract. We will explore these elements in depth in this unit. We will also discuss certain types of contracts that must be in writing to be enforceable and situations in which a contract is unenforceable due to a lack of genuine assent, such as in cases of fraud or mutual mistake of fact.

We enter into contracts every day. On the way to work, you pick up a newspaper at a news- stand. You also stop for a cup of coffee at a cafe. While there, you use your phone to browse the Web and purchase tickets to a concert online. Finally, you arrive at the bus stop and pay your fare as you enter the bus that will take you to work or to class. In each of these examples, a contract was made. In each case, there was a valid offer and acceptance (your ordering the drink and the cafe’s providing it), consideration (the cup of coffee and the money you pay for it), capacity and legality (you are (hopefully) of sound mind when pur- chasing the coffee, and coffee is a legal good that can be purchased and sold in the United States). There were no issues concerning mutual assent. No documents were signed, and no negotiations took place; nevertheless, valid contracts were formed giving each party certain rights and imposing on each party some responsibilities as well.

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The vast majority of contracts are routinely completed without a problem, and with- out the interested parties giving the matter much thought. Problems arise when par- ties to a contract fail to live up to their agreements, or misunderstand what it is that they agreed to do. In such cases, the courts may be called upon to settle the dispute in accordance with established rules of law that determine each party’s rights and obligations under a valid contract. Many misunderstandings and disagreements between contracting parties, as well as costly, time-consuming litigation, can easily be avoided if each party has a basic understanding of the law of contracts. The fol- lowing chapters will explore the requirements for the formation of valid contracts and the remedies available when they are breached.

Under the Uniform Commercial Code, the rules for sales of goods contracts are sometimes different. Where the UCC rules are an exception to a basic common law rule, they will be briefly discussed in this section, and other issues concerning the UCC and sales of goods will be explored in later chapters. But the common law of contracts is very much in effect today and is crucial to the running of every busi- ness, regardless of its size.

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Chapter Overview

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Learning Objectives

After studying this chapter, you will be able to:

1. Describe the difference between express, implied, bilateral, unilateral, simple, formal, and quasi contracts.

2. Explain the requirements for a valid offer and acceptance.

3. Explain the ways an offer may terminate.

4. Define consideration.

5. Recognize situations where consideration is not present.

4.1 Types of Contracts • Express Contracts v. Implied Contracts • Bilateral Contracts v. Unilateral Contracts • Simple Contracts v. Formal Contracts • Quasi Contracts (Contract Implied in Law)

4.2 The Offer • Clear Intent: An Unequivocal Promise • Reasonably Certain Terms • Offers and Termination

4.3 Acceptance • Communicating the Acceptance

4.4 Consideration • What Isn’t Consideration? • Past Consideration • Preexisting Duty • Illusory Promises • Distinguishing Illusory Promises and Requirement

Contracts • Exceptions to the Consideration Requirement

4.5 Chapter Summary • Focus on Ethics • Case Study: Hamer v. Sidway • Case Study: South Shore Amusements, Inc v.

Supersport Auto Racing Association • Critical Thinking Questions • Hypothetical Case Problems • Key Terms

4Contracts: Offer, Acceptance, and Consideration

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CHAPTER 4Section 4.1 Types of Contracts

A contract is a legally enforceable agreement. As this definition implies, a contract comes into existence from the voluntary assent of two or more individuals to enter into a legally binding agreement. Mutual accord is crucial to the formation of a contract. In order for there to be a valid contract, five basic elements must be present. Before we get into the detailed requirements for a valid contract in this unit, it may be useful to have at least a working definition for each of the required elements:

1. Offer: An invitation for another to enter into a contract. 2. Acceptance: Acquiescence to enter into a contract under the terms of the offer. 3. Consideration: Anything of legal value that is asked for and received as the price

for entering into a contract. 4. Legality: The extent to which the contract is legal and not against public policy. 5. Capacity: The mental competency to enter into a contract. Additionally, there are

special rules for people who are under legal age.

One party, referred to as the offeror, makes an offer—a business proposition—to another; the other, known as the offeree, accepts. Provided that the other three requirements are present (consideration, capacity, and legality), a valid contract is formed. If Manuela offers to sell Linda her laptop for $450 and Linda accepts the offer, a valid contract is formed since there is a valid offer and acceptance, consideration (something of value is given and received by each party—the laptop and the $450), capacity (both parties are of sound mind and are freely entering into the agreement), and the contract is for a legal purpose. In some cases, there is a further requirement that the contract be in a particular form, for example in writing, in order for it to be enforceable. In other situations, a contract may prove not to be binding because the parties did not truly assent, such as in the case of fraud or mistake.

So that seems relatively straightforward. But beware: contracts are not always so simple. In fact, there are many subtle and difficult issues that can arise when attempting to deter- mine if there is an offer and acceptance.

4.1 Types of Contracts

Contracts can be classified as express or implied in fact, bilateral or unilateral, and simple or formal. In addition, sometimes when a contract does not exist, there may be something known as a quasi contract (contract implied in law). Each type of contract will be briefly examined below.

Express Contracts v. Implied Contracts Express contracts are formed by the express language of the parties—the actual words they use in their agreement—and can be either written or oral.

Example 4.1. Sam says to Ben, “I’ll sell you my Business Law book for $50.”

Ben replies, “I’ll take it.”

It is a popular misconception that contracts are not binding unless they are in writ- ing. It’s always a good idea to reduce business agreements to writing to avoid future

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CHAPTER 4Section 4.1 Types of Contracts

Every time you buy something, you make a contract.

diego_cervo/iStock/Thinkstock

misunderstandings—and to keep the parties honest as to what it is that they have obligated themselves to do—but most contracts are legally valid whether they are oral or written. Some contracts, such as those creating an interest in real property, are required to be in writing, witnessed, notarized, and sealed in most jurisdictions. But the vast majority of contracts do not need to follow any of those formalities in order to be binding.

Implied contracts are formed not by the express words of the parties, but rather by their actions. Think about the last time you bought groceries. Did you tell the checkout clerk, “I offer to buy this gallon of milk at its advertised price?” Probably not, but the clerk understood that you wanted to enter into a contract, and accepted (by ringing up your order) on behalf of the store. As long as the parties’ actions plainly indicate an intention to enter into a contract, and as long as the terms of that con- tract can clearly be implied from those actions, a binding contract can be created even without a single word being spoken. Consider the following examples:

Example 4.2. Dana walks into a newsstand and places three quarters on the counter and takes a copy of her hometown newspaper.

Example 4.3. Steve enters Nilda’s hardware store. He picks up a screw- driver from a rack and, looking over at Nilda, who is taking care of a line of customers at the moment, waves the screwdriver in the air. She recognizes Steve, a long-time customer, and understands that he would like to take the screwdriver now and pay for the purchase later. She signals her consent by nodding in his direction. He leaves, taking the screwdriver with him.

In each of the above situations, an implied contract has been entered into. Dana has paid seventy-five cents for a copy of a newspaper and Steve has agreed to pay the selling price of the screwdriver to Nilda at a later time.

Bilateral Contracts v. Unilateral Contracts If the offeror (the person who makes an offer to enter into a contract) and offeree (the person to whom a contract offer is made) exchange promises to perform some act in the future, a bilateral contract is formed. For example:

Example 4.4. Bruce offers to sell his old car to Irving if Irving will pay him $2,000. Irving accepts the offer.

Example 4.5. Lina offers to babysit for Inga every Saturday for the next three months if Inga will pay her $8.00 per hour. Inga accepts.

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CHAPTER 4Section 4.1 Types of Contracts

Example 4.6. Tina offers to sing at Charles’s club next Friday, Saturday, and Sunday if he will pay her $5,000 per night. He agrees.

In each of the above examples, both parties are obligating themselves to take some action in the future. As soon as the offer is accepted, a valid contract comes into existence. When a bilateral contract is involved, the contracting parties exchange mutual promises to per- form some future act. As soon as a bilateral contract offer is accepted, a contract comes into existence and both parties are bound. If either party fails to live up to the agreement, a suit for breach of contract can result.

In a unilateral contract, one party makes a promise to the other that can only be accepted by the other’s performance. For example, if Lana offers to pay $100 to anyone who finds and safely returns Fluffy, her lost cat, Fred can accept and form a contract only by actually returning Fluffy safely to Lana. If Fred tells Lana, “I’ll find Fluffy later, I promise,” there is no acceptance, and no contract.

Simple Contracts v. Formal Contracts A simple contract is any oral or written contract that is not required to follow a specific form, or be signed, witnessed, or sealed. The vast majority of contracts entered into by businesses and private individuals are simple contracts, even though some may seem rather complex and go on for many pages.

A formal contract at common law was one that needed to be in writing, signed, witnessed, and sealed by the parties. A person’s seal on a contract (usually a unique mark made by a signet ring pressed into hot sealing wax, though a seal could be any symbol adopted by an individual or a company) gave that contract special significance. The distinction between simple and formal contracts is much less important today, and in many states is only used for contracts involving transfer of real estate.

Quasi Contracts (Contract Implied in Law) The first thing to know about a quasi contract is that it is not a real contract at all, but rather a situation where one person has given a benefit to the other and it seems as though it would be unfair for him to be not be paid. So a quasi contract is a situation where to prevent unjust enrichment, a court may award a remedy because a benefit was accepted, even though there is no contract. This is also called a contract implied in law. There are three distinct requirements to have a quasi contract:

1. One party has conferred a benefit on the other; 2. The party receiving the benefit chose to accept it; and 3. The benefit is the sort of thing a reasonable person would believe had to be paid

for, under the circumstances.

If the plaintiff proves the requirements for a quasi contract, the plaintiff is entitled to recover the fair market value of the benefit that was conferred on the receiving party.

Example 4.7. Peter had spoken with you about possibly painting your house, but no agreement was made. However, one day you look out your

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CHAPTER 4Section 4.2 The Offer

window and see Peter pull up in his work van, and begin to set up his lad- der. You don’t say a word to Peter, but simply let him paint the house. Even if there is no contract here, you have accepted the benefit (you could have told Peter to stop, but chose not to), and a reasonable person knows that they have to pay for painting services. Peter is entitled to the fair market value of the paint job.

But what if Peter comes over when you’re not home and paints your house? Because you did not accept (you had no chance to decline), there is no quasi contract and Peter is out of luck. (Peter should have taken a business law course!)

The law does slightly modify the rule in the case of emergency circumstances. If an ambulance takes your unconscious, injured body to the hospital and doctors treat you there, you are probably liable to pay for their services. Even though you could not accept or decline, for obvious public policy reasons the law wants to encourage provid- ers to give care in these situations. If they could not get paid, doctors might stop giving emergency care!

4.2 The Offer

An offer must contain an unequivocal (clear, unambiguous) promise to enter into a contract, must have reasonably certain terms, and must be communicated by the promisor (the person making the promise) to the promisee (the person to whom the promise is made). For example, Sam tells Ben, “I’ll sell you my car for $5,000.”

But suppose Sam instead says, “Would you give me $5,000 for my car?” That is not an offer, but merely an inquiry, which might open up negotiations or lead to an offer at some point. If Sam says, “I’d sure like to sell my car for $5,000,” there is no offer, because Sam is not committing to selling it to Ben at the present time.

What if Sam owns five cars? Then the subject matter is not certain enough to be an offer, unless Ben knows which one Sam intended to sell.

But if Sam only owns one car, and if Sam says, “If you give me $5,000, I’ll sell you my car,” Sam’s statement is unequivocal and constitutes an offer. They will have a contract if Ben accepts.

The couple holding this yard sale aren’t making any offers, merely inviting others to make offers on their household items.

David Sacks/DigitalVision/Thinkstock

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CHAPTER 4Section 4.2 The Offer

Clear Intent: An Unequivocal Promise An offer does not need to contain specific language such as “I promise to sell you” or “I offer to sell you” in order to be effective. What matters is that a reasonable person under the same circumstances would clearly understand that an offer was intended by the offeror. The lan- guage used is always important in helping to determine the intent of the parties, but a valid offer can be made even when no words are spoken, simply by the actions of the parties. If, for example, Muhammad holds out a twenty-dollar bill and tells Carol, “I’ll give you this for that fountain pen on your desk,” and Carol takes the money and puts it in her pocket with- out saying a word, she will have clearly accepted his offer by her actions. What is important in determining whether a valid offer or acceptance existed is the objective intent of the par- ties as communicated through their words or actions. In other words, would a reasonable person viewing the situation believe the parties intended to contract?

For example, on Tyrone’s drive to work one day, his car dies. Tyrone is very upset because this is the fourth time in two weeks that he’s had car trouble, and now he’s going to be late to work again. Tyrone gets out of the car, kicks the door, and yells, “I’d pay someone $10 to drive this piece of junk off a cliff!” Sofia happens to be walking by, and she could use $10 and she knows where there is a convenient cliff. Can she accept? No, because a reasonable person would realize that Tyrone is simply expressing his anger, and does not seriously intend to pay for his car to go over a cliff.

The subjective intent of the offeror and offeree are irrelevant and will not be examined by a court in determining intent to contract. What is important is not whether an offeror sub- jectively made an offer in jest, but rather whether the person to whom the offer was made, the offeree, should have realized that the offeror was only joking when he made the offer. It must be clear to an average person that the offer was not seriously intended; otherwise, the offeree can accept it and form a valid contract. Examine the following examples:

Example 4.8. Laverne tells Ernest: “I’d give you a million dollars for a kiss.” Ernest, knowing a good deal when he hears it, runs to her and gives her a quick smooch before she can change her mind.

Example 4.9. Deborah, exasperated at Gabe’s incessant chatter, tells him: “If you can keep your mouth shut for five minutes, I’ll give you an all- expense-paid cruise around the world.” He smiles and remains silent for the required time period.

In each of the above examples, if the offerees seek to enforce the offerors’ promises they will have a difficult time. Laverne and Deborah will almost certainly prevail if they claim that the offers were not seriously intended. Under the circumstances, a reasonable person should have realized that the offers were intended in jest and were not serious proposals. But consider the following example:

Example 4.10. Glen, a radio talk show host, is discussing a recent incident where the governor of the state was rumored to have had a sexual relation- ship with an intern. The governor’s opponents are demanding that he be prosecuted for perjury, since the governor said under oath at a hearing that he had never had sex with “that woman,” and there now is plenty

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CHAPTER 4Section 4.2 The Offer

of evidence that he did. Glen declares that a perjury case in these circum- stances would be ridiculous, and states, “No one gets prosecuted for lying about their sex life. I’ll pay $10,000 to anyone who can show me a case where that’s happened.” Joanna, a law student who has just read a case where a woman who falsely accused a man of raping her was prosecuted for perjury, promptly sends Glen a copy of the court decision.

Did Glen make an offer? In all likelihood, a court would say yes, because objectively it sounds as though he is serious, and he has been reasonably specific with the terms. He may have been joking, but what Glen was really thinking doesn’t matter! Since there is an offer, Joanna has accepted by doing the requested act, and they have a contract. Glen must pay the $10,000.

Reasonably Certain Terms Because the offer establishes the subject matter of what may become a binding agreement, the offer must be reasonably specific and certain. For example, if Brianna says to Matias, “I’ll sell you ten grade-A blue widgets at the price of a dollar per widget,” that is an offer.

But if Brianna instead says, “I’ll sell you some grade-A blue widgets at a price of a dollar per widget,” that is not specific enough, because there is no way of narrowing down what she meant by “some” widgets. Five? Fifty? Five hundred? Since not even a reasonable per- son can determine this, there is no offer. If Matias answers, “Great! I’ll take ten widgets,” he is actually the one making the offer.

Offers and Termination Assume we have established that an offer has been made. Emily offers to sell Terrell her only bicycle for $100. We have intent and reasonably certain terms. But before we turn our focus to the offeree, Terrell, to see if he has accepted, we must first establish that the offer is still open to him.

There are a number of ways in which offers can terminate, including revocation by the offeror, rejection or counteroffer by the offeree, lapse of time, death of either party, or destruction or illegality of the subject matter. If any of these occurs, it is too late for Terrell to accept and form a contract with Emily.

Revocation As a general rule, an offeror has the right to make a revocation of (cancel) the offer at any time prior to acceptance.

Example 4.11. Emily makes the following offer to Terrell: “I will sell you my Raleigh bike for $100. You can have until Friday noon to let me know.” Terrell is thinking it over. On Thursday, Emily calls Terrell and says, “Sorry, I changed my mind. I’m keeping the bike.”

Can Emily revoke, even when she said Terrell had until Friday? Yes, because Terrell had not yet accepted. It may not be very nice of Emily, but it is legal, and the offer has terminated.

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But there are some exceptions to this general rule—in other words, some situations where the offeror cannot terminate, even though the offer has not yet been accepted. Two com- mon exceptions are the option and the UCC’s firm offer.

Options exist when the offeree has given the offeror consideration to keep that offer open for a period. Suppose in the example above, Terrell wants to make sure he has until Fri- day noon to accept. He can pay Emily $10 for an option. This means in exchange for the money, Emily is giving up her right to revoke. If she now changes her mind on Thursday, Terrell can just ignore the phone call. If he accepts by calling Emily on Friday morning and saying “I’ll take that bike!” they will have a contract.

Note that Emily is not getting a down payment with that $10. Terrell still has to pay the full $100 for the bike if he accepts, and if he declines he will not get the $10 back. In a down payment situation, a contract has already been made.

The UCC has a special rule when merchants are offering to sell goods. Under Section 2-205, if a merchant makes an offer in a signed writing, giving assurance that the offer will stay open, it is a firm offer that she cannot revoke. However, the time period cannot exceed three months (if the offer states it is open for six months, the UCC automatically shrinks it down to three months). Some examples:

Example 4.12. ABC Inc. sends the following letter to Courtney: “We will sell you the Futura laptop with premium software loaded for $450. This offer is good until January 15.” The letter is signed by Andy Andrews, Vice- President. This is a firm offer.

Example 4.13. ABC Inc. calls Courtney with the same offer. This is not a firm offer, because it was oral.

Example 4.14. ABC Inc. offers in a signed letter to service Courtney’s company’s computers on a monthly basis for a set fee, giving her until January 15 to accept. This is not a firm offer, because it is not a contract for sales of goods.

So only in the first situation will Courtney have a contract if she calls Andy at ABC on January 6 and tells him that she accepts.

Lapse of Time If nothing is stated as to how long the offer will remain open, the law says that the offer will remain open for a reasonable amount of time. For example:

Example 4.15. Tawana makes the following offer to Jerome: “I will sell you my Dell laptop for $400.” Jerome tells Tawana that he’ll think about her offer. Two days later, he calls her and agrees to buy the computer under her terms. They have a contract. But if Jerome called her after a year, his acceptance is too late.

A reasonable time will vary with the subject matter. An offer to sell fresh raspberries will terminate before the offer for the laptop. If Tawana’s offer involved pork belly futures,

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Jerome’s acceptance would likely be too late, since that type of commodities market fluc- tuates widely in very short time periods.

Confusion may be avoided if Tawana simply states a time period in her offer. If she says “You have until 5 p.m. this Friday to call me and accept,” the offer will automatically expire if Jerome does not respond by then.

Rejection or Counteroffer by the Offeree If an offeree responds to the offer with either a rejection or a counteroffer, the offer termi- nates. For example, assume Emily offers to sell Ben her bike for $100. Consider the follow- ing possible responses by Ben.

“No, that’s too much.”

“I’ll give you $75.”

In the first example, Ben is rejecting Emily’s offer. In the second, he is making a counterof- fer. In both of these situations, Emily’s offer promptly terminates. If Ben changes his mind later and calls up Emily, saying, “I accept! I’ll give you $100 for that bike,” Ben is actually making an offer to Emily. There is no contract unless Emily chooses to accept.

But what if the conversation goes like this:

Emily: “I’ll sell you my bike for $100.”

Ben: “Hmm. That seems a little high. Would you take $75?”

Emily: “No.”

Ben: “Okay, I accept. I’ll buy the bike for $100.”

This time, they have a contract. Ben’s remark was not an outright rejection, and he is not making a counteroffer since he does not say he will buy the bike for $75. He is merely engaging in a little negotiation, which has not affected Emily’s offer. The offer was still open when Ben accepted.

Death, Incompetence, Destruction, and Illegality If either offeror or offeree dies or loses his mental competency before the offer has been accepted, the offer terminates. Emily offers to sell her bike to Ben for $100. If either Emily or Ben now dies,

Negotiating a contract must be undertaken with care. An inquiry or question will not affect the offer, but a counteroffer or rejection takes the original offer off the table.

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the offer dies with them. But if Emily makes her offer, and then Ben accepts, and now Emily dies, note that they already had made a contract and it does not terminate.

The exception to this rule is if the offer was part of an option. So if Emily offers to sell her house to Ben for $100,000, and Ben paid her $75 for a thirty-day option, the offer will stay open for the thirty days even if either Emily or Ben dies. In that case, the estate of the dead person could perform instead.

If Emily offers to sell Ben her bike, but before he can accept, Emily’s neighbor backs her SUV over the bike, rendering it into a twisted metal and rubber abstract sculpture, the offer terminates due to destruction of the subject matter.

If Sandra offers to sell Damian a carved ivory statue, and now the government outlaws the sale of ivory (to protect endangered elephants), the offer terminates due to illegality.

4.3 Acceptance

Acceptance of an offer is the clear manifestation of assent to the terms of the offer. For an acceptance to be valid, it must be (1) made by a person to whom the offer was made, (2) unequivocal, and (3) communicated to the offeror. The first require- ment is simple: only a person to whom an offer was made may accept it. The following example will illustrate:

Example 4.16. Professor Smith, an attorney, offers to draft a will for anyone in his Business Law class for $25. Bill Jones, who is not a student in the class, overhears the offer while passing by the lecture hall and promptly walks to accept the offer. Bill’s acceptance is not valid since the professor’s offer was made only to students in his class and could be accepted only by them.

It also must be clear from the offeree’s words or actions that he intends to accept the offer- or’s offer under the offeror’s terms. Under the common law’s mirror image rule, which is still used for situations involving subject matter other than sales of goods, an acceptance was deemed valid only if it mirrored the offer exactly. A deviation constituted a counterof- fer, which revoked the original offer. For example, Peter offers to paint Harry’s house for $3,000, and Harry responds: “I accept. Use Benjamin Moore brand paint.”

Since Peter’s offer said nothing about what type of paint he was willing to use, this is a counteroffer and they do not yet have a contract.

The mirror image rule has been modified by Article 2 of the Uniform Commercial Code in transactions involving the sale of goods. Under UCC Section 2-207, acceptance is valid even if it contains terms different from the original offer unless it is conditioned on the offeree accepting the additional terms. The additional terms in the acceptance are simply ignored and the contract is formed under the terms of the offeror’s offer.

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Example 4.17. Peter offers to sell a painting of an Irish landscape that he did on vacation last year for $350.

Harry responds: “I accept. Put it in one of those pretty gilt frames.”

Harry and Peter have a contract, and Harry is committed to buying the painting. But Peter does not have to put it in the gilt frame. But if Harry had instead responded to Peter’s offer by saying, “I accept as long as you put it in a gilt frame,” there would be a counteroffer by Harry and thus no contract at this point. This is because Harry has explicitly tied his acceptance to Peter’s agreeing to the additional term. When condi- tional language such as “I accept as long as/but only if/contingent upon” is used in this way, the result is a counteroffer.

However, if both parties are merchants (individuals engaged in the business of buying and selling goods of the type involved in the contract), the additional terms in the accep- tance become part of the contract unless:

1. they are objected to within a reasonable time of receipt of the acceptance; 2. the additional terms materially alter the contract; or 3. the offer specifically limits acceptance to the stated terms.

Note that whether the statement is an acceptance or a counteroffer has not changed for the merchants; we are only dealing here with the terms of the contract. Consider these examples:

Example 4.18. Peter, of Peter’s Famous Art Gallery, offers to sell a certain painting for $350.

Harry, of Harry’s Other Famous Art Gallery, responds: “I accept, as long as you deliver by Friday.” There is no contract because Harry made a counteroffer.

Example 4.19. Peter makes the same offer. This time Harry says, “I accept. Deliver to my place Friday.” They have a contract. Because they are both merchants, Peter must deliver to Harry as noted.

Example 4.20. Same as number 2 above, except Peter, who doesn’t want to deliver, promptly calls Harry and says, “Thanks for buying the painting, but you have to pick it up.” Because as the offeror he has objected within a reasonable time, the additional term about delivery is not part of the deal.

In transactions other than contracts for the sale of goods, the mirror image rule is still very much in force for both merchants and nonmerchants alike.

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CHAPTER 4Section 4.3 Acceptance

Communicating the Acceptance Suppose an offer has been made to you and you want to accept. You already know what to say (because you just read the section above). But how should you communicate this acceptance to the offeror?

If the offeror stated already how you are to accept, you must follow exactly the offeror’s instructions. For example:

Example 4.21. Carlos offers to sell you his acoustic guitar for $300, and adds that you should reply by e-mail.

Emily offers to sell you her bike for $100 and says she must receive your acceptance in writ- ing by 3 p.m. Thursday.

Edmund offers to employ you as his butler for $10,000 per month, and states that to accept you must climb the Matterhorn and plant a red flag on the summit that says “I accept.”

In all of these situations, the offeror has directed the means of acceptance. To contract for the guitar, you must e-mail Carlos. If you call him up, you will actually be making a coun- teroffer. If you attempt to accept Emily’s offer by mailing an acceptance on Tuesday that she receives on Friday, that will be another counteroffer. And as for Edmund . . . well, get out your ice pick and make a reservation for Switzerland if you really want that job! Note that this is all up to the offeror; there is no requirement that he be reasonable. The offeror can make acceptance just as difficult, or silly, as he wishes.