Chapter 6.docx

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University of Guelph
Marketing and Consumer Studies
MCS 3040
Joseph Radocchia

Chapter 6: Forming Contractual Relationships An Agreement • Parties must be in an agreement before a contract can take place • They must have reached a consensus as to their rights and obligations Offer • An offer is a promise to enter into a contact on specified terms as soon as the offer is accepted Certainty of Offer • Only a complete offer can form the basis of a contract • All essential terms must be set out or the contract will fail for uncertainty • An offer does not have to meet the standard of perfect clarity and precision in how it is expressed • If the parties intend to have a contract, the courts will attempt to interpret the alleged offer in as reasonable of a fashion as possible and thereby resolve uncertainties • An offer can achieve the mandatory standard of certainty even if it leaves certain matters to be decided in the future Invitation to Treat In law, the latter form of communication is called an invitation to treat and has no legal consequences Invitation to treat is an expression of willingness to do business Whether a communication is an offer or an invitation to treat depends on the speaker’s intention, objectively assessed Vague commitments to buy or sell tracking are invitations to treat and not offers because they fail to specify the terms or scope of the proposed arrangement • The common law has devised a number of rules, to assist in the sometimes difficult task of classifying whether a communication is an offer or an invitation to treat • A rule particular significance to business relates to the advertising and display of foods for sale in a store • Enterprises such as retail outlets prosper by attracting customers to their premises. They do this through advertising their existence, as well as describing the products they sell and prices they charge, especially when those prices have been reduced • For practical reasons, these advertisements are generally not classified as offers • If advertisements were offers, the store owner would be potentially liable for breach of contract if the store ran out of an advertised item that a customer wished to purchase • By classifying the advertisement as an invitation to treat, the law ensures that it is the customer who makes the offer to purchase the advertised goods • The owner is then in a position to simply refuse the offer if the product is no longer in supply • As a result of this refusal, no contract could arise • In this way the law seeks to facilitate commercial activity by permitting a businessperson to advertise goods or services without ordinarily running the risk of incurring unwanted contractual obligations • The display of a product in the store is not an offer by the store to sell, it is an invitation to treat and, by definition, is not capable of being accepted • In this way, the store maintains the option of refusing to complete the transaction at the cash register • Standard form contract: a “take it or leave it” contract, where the customer agrees to a standard set of terms that favours the other side • Sales and rentals businesses frequently require their customers (consumer and commercial) to consent to a standard set of terms that have been developed by the business over years of operation. • Such contracts often heavily favour the business that created them and because they are not usually subject to bargaining, are known colloquially as “take it or leave it” contracts • Standard form contracts are not inherently object objectionable, however, since they help reduce transaction costs and increase business volume, thereby potentially lowering price • A fundamental rule is that a contract is formed only when a complete offer is unconditionally accepted by the other side • The key decision in deciding whether an offer has been made: if the purported offer is sufficiently comprehensive that it can be accepted without further elaboration or clarification, it is an offer in law • The person who makes an offer is known as the offeror • The person who an offer is made to is known as the offeree Termination of Offer • An offer can be accepted only if it is “alive”, meaning it is available to be accepted • If the offer has been legally terminated, no contract can come into existence, since one of its essential ingredients-the offer itself- is missing • An offer can be terminated “or taken off the table” by any of the following: 1. Revocation  The offeror can revoke his offer at any time before acceptance simply by notifying the offeree of its withdrawals  An offer than has been revoked does not exist anymore and therefore cannot be accepted 2. Revocation in the context of a Firm Offer  The law permits offerors to revoke their offers despite a promise to leave the offer open for a set period of time (called a firm offer)  Such a promise is enforceable only if the other party has purchased it or otherwise has given the offeror something in return for the commitment  Option agreement: an agreement where, in exchange for payment, an offeror is obligated to keep an offer open for a specified time  If the offeror withdraws the offer before the option agreement permits, he has committed a breach of contract, and the offeree can sue for damages  Options agreements are commonly found in real estate developments. The developer will buy a number of options to purchase land from owners in the development area. The developer can choose whether to exercise the options and knows that during the option period, the owners are contractually bound to not withdraw their offers to sell at the specified price  Prudent business practice would have the offeror expressly revoking offers as necessary 3. Revocation in the Context of a Tendering Contract  A specialized set of rules governs the tendering process When an owner wishes to secure competitive bids to build a large project, for example, it typically calls for tends  In response, contractors (aka tenderers) submit tenders (or offers) that set out a price for the work to be done  If the ordinary rule of revocation applied, a contractor could simply withdraw its tender any time prior to acceptance and thus be positioned to avoid any commitments it would ultimately rather avoid  The Supreme court of Canada said that the call for tenders could be construed an offer of a preliminary contract known as contract A  Contract A typically requires the tenderer and the owner to follow the rules governing the tender selection process, including a promise by the tenderer not to revoke its tender for a specified period of time  Everyone who submits a tender is accepting the offer of a Contract A to govern the relationship as well as offering to enter into Contract B, if chosen to do so  Contract B refers to the larger contract to perform the work in question  While there would be an many Contract A’s as there were tenders, only the successful tenderer would enter into a Contract B with the owner  Should the tenderer seek to revoke its tender before the specified period of time has elapsed, it is likely a breach of Contract A and subject to legal action by the owner  As well, if the tenderer refuses to enter into Contract B when chosen to do so, it has committed another breach of Contract A7 4. Lapse  Lapse: The expiration of an offer after a specified or reasonable period  If an offer has no expiry date, it will remain open for a reasonable period of time, which, in turn, will depend on all the circumstances of the case including the nature of the transaction at issue 5. Rejection  Rejection: The refusal to accept an offer  The offer can only be accepted if the offerer revives it but offering it again or if the offeree presents it as his own offer, which can then be accepted or rejected the original offereor  Risk of rejecting an offer, it may never be renewed by the other side 6. Counteroffer  Counteroffer: The rejection of one offer and proposal of a new one  Any change to an offer- including to price, quantity, time of delivery, or method of payment- is a counteroffer  Because a counteroffer is a rejection, the original offer is automatically terminated and can be accepted only if it is renewed b one of the parties  By counteroffering, the party jeopardizes the change of being able to accept the original offer 7. Death or insanity  If the offer concerns a contract that would not require the affected party to personally perform it, a court may decide that the offer could be accepted although that party’s death  Someone who makes an offer and then subsequently becomes insane would not be bound, as a general rule Acceptance • Acceptance: The complete willingness to enter into a contract on the terms in the offer • If the claimed acceptance does not mirror the offer by agreeing to all its content, it is a counteroffer and no contract has been formed Communication of acceptance  In order to effect legal acceptance, the offeree must communicate- by words or by conduct- an unconditional assent to the offer in its completeness  The message can be conveyed in any number of ways: in person, in writing, by mail, by email, by telephone, and other actions  The offer must be scrutinized to determine if it requires a specific method of communicating an acceptance  If it does, and by the terms of the offer that method of communication is mandatory, then the offeree must follow that method of communication in order to ensure legal acceptance For example: if a company offers by telephone, to sell a given item but specifies that acceptance must be in writing, then the offeree’s calling back with a
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