Termination of the Power of Acceptance

Terms:

Counteroffer:
An offeree’s new offer that varies the terms of the original offer and that therefore rejects the original offer.

Option Contract:
A contract made to keep an offer open for a specified period so that the offeror cannot revoke the offer during that period. The promise to keep the offer open is supported by consideration.

Conditional or Qualified Acceptance:
A conditional or partial acceptance that varies the original terms of an offer and operates a counteroffer.

Firm Offer:
An offer that, by its expressed or implied terms, is to remain open for a certain period of time.

An offeree can conclude a bargain by accepting the offer he is given but only if his power of acceptance has not been terminated.

Termination of the offeree’s power of acceptance can result from any of the following six causes:

(1) expiration or lapse of the offer,
(2) rejection by the offeree,
(3) a counteroffer by the offeree,
(4) a qualified or conditional acceptance by the offeree,
(5) a valid revocation of the offer by the offeror, and
(6) by operation of law.

We will now examine each of these six causes in detail.

(1) Expiration or lapse of the offer

The most common manner in which the power of acceptance can be terminated is through expiration or lapse of the offer. When and how an offer expires is partly determined by whether a time period is fixed to the offer itself. If the offer states that it will be held open for a certain period of time, the offeree’s power of acceptance automatically expires at the end of that period. For example:

Ben is looking to buy four thousand gallons of milk per month that he needs for his ice cream factory. Jerry owns a dairy farm and offers to sell Ben four thousand gallons of milk per month for $1 per gallon. Jerry tells Ben that the offer will be held open for two weeks. In this situation, Ben has two weeks in which to accept Jerry’s offer. If Ben does not accept the offer within two weeks, the offer automatically lapses and Ben’s right to accept the offer is terminated.

Let’s say that Jerry had made his offer to Ben through the mail and the letter says that Jerry will sell Ben four thousand gallons of milk per month for $1 per gallon and the offer will be held open for two weeks. The question is when does the two week period begin to run? Will the offer be held open for two weeks from the day that Jerry sent the offer or for two weeks from the day that Ben received the offer?

The general rule is that, unless the offer specifically says otherwise, the two weeks begins on the day that Ben receives the offer. See Caldwell v. Cline 156 S.E. 55 (W. Va. 1930).

If the offer does not state a specific period of time during which it will remain open, the offeree’s power of acceptance expires after a reasonable amount of time.

What constitutes a reasonable amount of time depends on the circumstances. When parties are bargaining face-to-face or over the phone, the time for acceptance usually does not extend beyond the end of the conversation unless a contrary intention is indicated. For example, if the offeror tells the offeree to take some time to think the offer over, the offeree will have a reasonable amount of time to consider the offer and accept it if he chooses to.

When an offer is sent by mail, acceptance is considered timely if it is sent within a reasonable time under the circumstances.

(2) Rejection by the offeree

The right of acceptance can also be terminated by the offeree’s rejection of the offer. If the offeree rejects the offer, his power of acceptance is terminated even if the power of acceptance would not have otherwise lapsed. For example:

On February 1st, Picasso offers to paint Michelangelo’s house. Picasso tells Michelangelo that he has until February 10th to accept the offer. Michelangelo rejects Picasso’s offer on February 5th. Michelangelo’s power to accept the offer is now terminated, even though he would have had five more days to accept the offer had he not rejected it on February 5th.

Please note that some jurisdictions hold that a rejection during the offer period does not terminate the offeree’s power of acceptance. In those jurisdictions, Michelangelo would still have the remaining five days to change his mind and accept Picasso’s offer.

(3) A counteroffer by the offeree

The offeree’s power of acceptance can also be terminated by a counteroffer.

A counteroffer is an offer made by the offeree to the offeror that concerns the same subject matter as the original offer but differs in its terms. For example:

Picasso offers to paint Michelangelo’s house for $5,000. Michelangelo tells Picasso that he will pay $4,000. Michelangelo has given Picasso a counteroffer which terminates his power to accept Picasso’s original offer. Once Michelangelo has made his counteroffer, Picasso does not have to paint Michelangelo’s house if Michelangelo changes his mind and accepts Picasso’s original offer.

As we have just said, the legal effect of the counteroffer is that it terminates the offeree’s power of acceptance. However, the counteroffer is also an offer in and of itself and therefore, it creates a new power of acceptance in the original offeror. Note our example:

Picasso offers to paint Michelangelo’s house for $5,000. Michelangelo tells Picasso that he will pay $4,000. Michelangelo has given Picasso a counteroffer which terminates his power to accept Picasso’s original offer. However, the counteroffer is also an offer in and of itself so that Picasso can either accept Michelangelo’s offer to paint the house for $4,000 or he can reject the offer.

Please note that the offeree’s power of acceptance is not terminated by an inquiry concerning the offer or by a request for different terms. For example:

(1) Picasso offers to paint Michelangelo’s house for $5,000. Michelangelo asks Picasso if the price includes the cost of materials. This is not a counteroffer and Michelangelo is still free to accept Picasso’s offer.

(2) Picasso offers to paint Michelangelo’s house for $5,000. Michelangelo asks Picasso is there is any way he would do it for $4,000. This is not a counteroffer. This is simply a request for different terms and it does not terminate Michelangelo’s power to accept Picasso’s offer.

An option contract is a contract in which the offeror promises to keep his offer open for a certain amount of time and the offeree actually gives the offeror consideration for that promise (as opposed to our examples at the beginning of this chapter where no consideration is given for the promise to hold the offer open).

Where option contracts are involved, a counteroffer made during the option period does not terminate the power of acceptance because the offeree has the contractual right to have the offer held open during its term. See Humble Oil and Refining Co., v. Westside Investment Corp., 428 S.W.2d 92 (Tex. 1968). For example:

Picasso offers to paint Michelangelo’s house for $5,000. Picasso agrees to keep the offer open for one month and, in exchange, Michelangelo gives Picasso $100 to keep the offer open for the month. In this situation, any counteroffer that Michelangelo makes during that month does not terminate his power of acceptance because he has the contractual right to have the offer held open for the entire month and thus, he has the contractual right to accept that offer for the entire month.

(4) A qualified or conditional acceptance by the offeree

A conditional or qualified acceptance is an acceptance that adds to, or changes, the terms of the original offer. This is essentially a counteroffer. A conditional or qualified acceptance generally terminates the offeree’s power of acceptance. For example:

Sunshine Orange Groves makes a written offer to SqueezeMe Juice Company to sell SqueezeMe five thousand bushels of oranges at $10 per bushel. SqueezeMe responds saying that “we accept your offer on the condition that you pay for the shipping.” SqueezeMe’s reply is a conditional acceptance and therefore, terminates their power to accept Sunshine’s offer.

Just like a counteroffer, a conditional or qualified offer is an offer in and of itself and can be accepted or rejected by the original offeror.Please note that an unconditional acceptance, coupled with a request is considered a valid acceptance. For example:

Sunshine Orange Groves makes a written offer to SqueezeMe Juice Company to sell SqueezeMe five thousand bushels of oranges at $10 per bushel. SqueezeMe responds saying “we accept your offer and we hope that you will pay for the shipping.” SqueezeMe’s response is a valid acceptance because, in this case, paying for shipping is only a request and not a condition upon which acceptance hinges.

An offeree’s power of acceptance is not terminated by an acceptance that is conditional or qualified in form but not in substance. For example:

Sunshine Orange Groves makes a written offer to SqueezeMe Juice Company to sell SqueezeMe five thousand bushels of oranges at $10 per bushel. SqueezeMe responds, saying “we accept your offer on the condition that the oranges are fit for juice.’ Here, SqueezeMe’s response is a valid acceptance. Although SqueezeMe’s answer is a conditional acceptance in form (it looks like a conditional acceptance) the condition really only spells out an implied term of the offer. SqueezeMe is a juice company and so implied in Sunshine’s offer is that the oranges will be fit for SqueezeMe’s business purposes. Therefore, SqueezeMe’s response is conditional in form but not in substance and is considered a valid acceptance.

Under common law, an acceptance had to be a “mirror image” of the offer. In other words, if an acceptance deviated from the offer in any way, it was deemed a qualified or conditional acceptance and did not constitute a valid acceptance. Instead, it had the legal effect of a counteroffer.

(5) A valid revocation of the offer by the offeror

Termination of an offer can also arise through a valid revocation of the offer by the offeror. A revocation is a retraction of the offer. For example, if Marsha offers to sell Jan a box of Girl Scout Cookies for $1 and, before Jan accepts, Marsha changes her mind and withdraws the offer, the offer has been revoked and Jan’s power to accept the offer has been terminated.

The general rule is that a revocation is effective when the offeree receives it. For example:

On January 1st, Marsha makes a written offer to Jan to sell her a case of Girl Scout cookies for $50. On January 3rd, Marsha writes Jan another letter revoking the offer. Jan receives the offer in the mail on January 6th and she receives the withdrawal on January 9th. According to the general rule, Marsha’s withdrawal does not become effective until Jan receives it on January 9th.

The fact that a revocation becomes effective only when the offeree receives it becomes problematic when offers, acceptances and revocations are sent back and forth through the mail. For example:

On January 1st, Marsha makes a written offer to Jan to sell her a case of Girl Scout cookies for $50. On January 3rd, Marsha writes Jan another letter revoking the offer. Jan receives the offer in the mail on January 6th and immediately writes Marsha a letter accepting the offer. Jan puts her letter of acceptance in the mail on the same day, January 6th. On January 9th, Jan receives Marsha’s letter of revocation. In this situation, Marsha and Jan have a binding contract. As we said earlier, acceptance of an offer is effective upon dispatch. In other words, Jan’s acceptance of Marsha’s offer becomes effective as soon as she puts her letter of acceptance in the mail. However, a revocation of an offer does not become effective until the offeree receives it. Therefore, Jan’s acceptance was valid on January 6th while Marsha’s revocation only became valid on January 9th. That being the case, the offer was still available to Jan on January 6th, even though Marsha wrote her letter of revocation on January 3rd. By the time Jan received Marsha’s letter of revocation, she had already accepted the offer. Therefore, Jan and Marsha have a valid contract and Marsha must sell Jan the cookies for $50.

Additionally, in order for a revocation to be effective, it must be communicated by the offeror to the offeree. However, there are two exceptions to this rule.

The first exception involves offers made to the public. An offer made to the public (ex: rewards) can be revoked by publishing the revocation in the same fashion that the offer was published. This kind of publication terminates the power of acceptance, even for those people who might have seen the offer but did not see the revocation. For example:

On January 1st, Brian publishes an ad in the New York Times offering a $50 reward to anyone who returns his lost cat Fudgie. On January 4th, Brian gives up hope of finding Fudgie and publishes a revocation of his reward offer in the New York Times. On January 7th, Sam finds Fudgie and, remembering the reward offer she had seen in the New York Times, returns Fudgie to Brian. Sam is unaware of the published revocation. In this case, Brian is not legally obligated to pay Sam the reward. Brian’s revocation of the reward offer was published in the same medium as the original offer. Therefore, the offer is validly revoked and Sam’s power of acceptance is terminated even though she never saw the published revocation.

The second exception involves indirect revocations. An offer is considered revoked, even if there is no direct communication between the offeror and the offeree, if the offeree receives reliable information that the offeror has taken action showing that he has changed his mind. See Dickenson v. Dodds, 2 Ch.D. 463 (1876). For example:

Michael owns a large piece of property in the Chicago area that consists of a mansion and five acres of grounds. After getting tired of Chicago and deciding to move to Washington D.C., Michael offers to sell Scottie the land and the mansion for $4 million. Michael makes the offer on September 1st and he tells Scottie that he will hold the offer open until September 15th. On September 12th, Michael sells the property to Phil. On September 13th, Scottie finds out that Michael had sold the property to Phil. On September 15th, Scottie gives Michael a written acceptance of Michael’s offer. In this case, Scottie’s acceptance is invalid. The fact that Scottie received reliable information that Michael had changed his mind and sold the property to Phil has the same effect as a revocation and therefore, Scottie’s power to accept the offer was terminated.

A “firm offer” is an offer that, by its expressed or implied terms, is to remain open for a certain period of time. In our last example, Michael made Scottie a firm offer because he agreed to hold the offer open for a certain amount of time.

The general rule is that revocation of a firm offer before the stated time period has run out has the same effect as a revocation of an ordinary offer. For example, where Michael offers, on September 1st, to sell his land to Scottie and agrees to keep the offer open until September 15th, Michael can still make a valid revocation of the offer even before the fifteen day period has passed.

The reason for this is because, when an offeror agrees to keep an offer open for a certain amount of time, he is making a promise. However, this promise is made without consideration and, as we said at the very beginning of our contracts course, a promise with no consideration is not binding.

There are several exceptions to this rule:

The first exception involves option contracts. As we have stated, an option contract is a contract in which the offeror agrees to keep the offer open for a certain amount of time and the offeree gives the offeror some kind of consideration in exchange for leaving the offer open. If the offeree gives consideration for the promise to leave the offer open, the offer is irrevocable for the stated time period. See Humble Oil and Refining Co., v. Westside Investment Corp., 428 S.W.2d 92 (Tex. 1968). For example:

(1) On September 1st, Michael offers to sell Scottie a piece of property for $4 million. Michael tells Scottie that he will hold the offer open until September 15th. On September 13th, Michael revokes the offer. On September 15th, Scottie gives Michael a written acceptance of Michael’s offer. In this case, Scottie’s acceptance is invalid because, even though Michael promised to keep the offer open until September 15th, Scottie did not give Michael any consideration for the promise. Therefore, Michael’s promise was not binding and he could validly revoke the offer at any time before the fifteen day period had lapsed.

However,

(2) On September 1st, Michael offers to sell Scottie a piece of property for $4 million. Michael tells Scottie that he will hold the offer open until September 15th and, in consideration for Michael’s promise, Scottie gives Michael $1,000. On September 13th, Michael revokes the offer. On September 15th, Scottie gives Michael a written acceptance of Michael’s offer. In this case, Scottie’s acceptance is valid because Scottie has given Michael consideration for the promise to keep the offer open. Therefore, Michael’s offer to Scottie is irrevocable until after September 15th. That being the case, Michael’s revocation of the offer on September 13th was invalid and Scottie was still free to accept the offer on September 15th.

Please note that a firm offer becomes irrevocable even if the offeree only gives nominal consideration in exchange for a promise to leave the offer open. For example:

On September 1st, Michael offers to sell Scottie a piece of property for $4 million. Michael tells Scottie that he will hold the offer open until September 15th and, in consideration for Michael’s promise, Scottie gives Michael a nickel. Obviously, neither Michael nor Scottie considers the nickel to be payment for Michael’s promise to keep the offer open. This is nominal consideration. However, for the purposes of turning a revocable firm offer into an irrevocable option contract, nominal consideration is adequate.

Do not confuse this with an ordinary donative promise where nominal consideration is not adequate to make the promise binding.

The next exception to the rule that states that firm offers are revocable before their stated time periods have lapsed involves reliance.

The rule here is that a firm offer is irrevocable if the offeror should have reasonably foreseen that the offeree would rely on the offer before accepting it and the offeree actually does rely on the offer. For example:

SevenSeas Shipbuilding Co. has received a bulletin that the Pentagon is going to commission two new aircraft carriers to be built. The Pentagon has asked that all bids be submitted by March 30th at 5:00 PM. SevenSeas begins preparing its bid and, in doing so, they ask various subcontractors to give them sub-bids for doing the electrical wiring for the ships. On March 1st, VoltCorp gives SevenSeas a written bid to do the electrical work for $150,000 and says that the bid will be held open for acceptance by SevenSeas until April 5th. SevenSeas uses VoltCorp’s bid in making up their overall bid. On March 30th, SevenSeas submits its bid to the Pentagon. When the Pentagon reviews the bids on March 31st, SevenSeas’ bid is the lowest and they are immediately awarded the Pentagon’s contract. At 10:00AM the next day, before SevenSeas has formally accepted VoltCorp’s sub-bid, VoltCorp contacts SevenSeas and tries to revoke its sub-bid. This revocation is ineffective. VoltCorp should have reasonably foreseen that SevenSeas would rely on their sub-bid in making up the overall bid. Therefore, VoltCorp’s promise to hold the sub-bid open until April 5th is irrevocable.

In addition, a promise to hold an offer open can be implied rather than expressed. For example, even if VoltCorp had not explicitly promised to hold their sub-bid open until April 5th, there would be an implied promise to hold the sub-bid open for a reasonable time after the Pentagon awarded the contract.

As far as firm offers for the sale of goods are concerned, the U.C.C. states that a written and signed offer by a merchant to buy or sell goods which promises that it will be held open is irrevocable for the stated period of time, even if no consideration has been given for the promise. If there is a promise to hold the offer open but no specific time period is laid out, the offer cannot be revoked for a reasonable amount of time. However, whether the time period is specifically laid out or not, an offer cannot be held open for longer than three months. See U.C.C. 2-205.

For U.C.C. 2-205 to be applicable, four elements must be present. First, the offer must be in writing and must be signed by the offeror. Second, the offer must clearly state that it is irrevocable for a certain period of time. Third, like all U.C.C. Article II provisions, the contract must be for the sale of goods. Fourth, the offeror must be a merchant. For example:

On January 1st, Andrew, a textile manufacturer makes a written offer to sell a set of scuba gear to Mark for $1,000. The offer states that it will be held open until January 15th. On January 10th, Andrew revokes his offer. This revocation is valid. Although the offer is written and signed and although it clearly states that it is irrevocable and it is a contract for the sale of goods, Andrew is not a merchant within the meaning of 2-104 (Andrew is a merchant but he is a textile merchant, not a scuba gear merchant). Therefore, 2-205 does not apply here and, assuming that Mark has not foreseeably relied on Andrew’s offer, the offer is revocable. See U.C.C. 2-104 for the U.C.C’s definition of a merchant.

We said earlier that a unilateral contract is a contract where the offeror makes a promise and the offeree demonstrates his acceptance with an act. Issues arise when an offeror for a unilateral contract attempts to revoke the offer after performance has begun but before performance has been completed.

Under the old rule, an offer for a unilateral contract was revocable until the offeree had completed performance. Therefore, even if the offeree had begun performance, the offeror could revoke the offer. See Petterson v. Pattberg, 248 N.Y. 86 (1928). For example:

Rudy promises George $500 if George runs around Central Park. George begins running and, when he is half way around the park, Rudy revokes his offer. Under the old rule, the revocation is valid because George had not yet completed performance.

Under the modern rule, an offer for a unilateral contract cannot be revoked once performance has begun unless performance is not completed within a reasonable time. For example:

Rudy promises George $500 if George runs around Central Park. Under the modern rule, once George begins running, Rudy cannot revoke his offer. If, however, performance is not completed within a reasonable time, Rudy may revoke his offer.

Please note that there is a difference between performance and preparing to perform. An offeror cannot revoke an offer once the offeree has begun performance. However, if the offeree has only begun preparing to perform but has not yet started performance, the offeror can revoke the offer. For example:

(1) Rudy promises to pay George $500 if George runs around Central Park. George begins running. At this point, performance has begun so Rudy can no longer revoke his offer.

(2) Rudy promises to pay George $500 if George runs around Central Park. George goes to Nike Town and buys a new pair of shoes in preparation for his run. After George buys the shoes but before he starts running, Rudy revokes the offer. This is a valid revocation because George has not yet begun performance. Buying the shoes represents preparation to perform but it is not the beginning of performance itself.

(6) By operation of law

Finally, an offeree’s power of acceptance may also be terminated by operation of law through either the death or incapacity of the offeror or as the result of a changed circumstance. An offeree’s power of acceptance is terminated by the offeror’s death or incapacity whether or not the offeree knows of the death or incapacity. For example:

On January 1st, Gilligan sends Skipper an offer to buy Skipper’s boat for $50,000. The offer states that it will be held open until January 12th. On January 8th Gilligan drowns. On January 9th Skipper, unaware of Gilligan’s death, mails an acceptance of Gilligan’s offer. The acceptance is ineffective because Skipper’s power of acceptance was terminated on January 8th by Gilligan’s death.

Please note that death or incapacity of the offeror does not terminate the offeree’s power of acceptance under an option contract, at least where individual performance by the decedent was not part of the proposed contract. So, for example, the grant of an option to buy property is binding on the decedent’s estate.

In our previous example, if Skipper had given Gilligan consideration for leaving the offer open, Skipper could accept Gilligan’s offer even after Gilligan’s death and the option would be binding on Gilligan’s estate.

As far as unilateral contracts go, the rule is that the offeree’s power of acceptance is not terminated by the offeror’s death or incapacity once the offeree has begun performance. For example:

(1) On February 1st, Michelangelo writes to Picasso “if you paint my house by February 15, I will pay you $500.” On February 3rd, Picasso begins painting the house. On February 4th, Michelangelo dies. Picasso’s power of acceptance here is not terminated by Michelangelo’s death. Michelangelo’s offer was for a unilateral contract and, when Picasso began performance, the contract became irrevocable.

(2) On February 1st, Michelangelo writes to Picasso “if you promise to paint my house by February 15th, I will pay you $2,000. Let me know your answer by February 10th. On February 4th, Michelangelo dies, unbeknownst to Picasso. On February 5th, Picasso sends a letter accepting Michelangelo’s offer. Here, Picasso’s acceptance is ineffective. Michelangelo’s offer was for a bilateral contract and Picasso’s power of acceptance was therefore terminated by Michelangelo’s death.

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