Chapter 6

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Department
Marketing and Consumer Studies
Course
MCS 3040
Professor
Joseph Radocchia
Semester
Winter

Description
Chapter 6: Forming Contractual Relationships Midterm Notes The Contract • Basic elements of a contract: ◦ An agreements (composed of offer and acceptance) ◦ Complete (certain) ◦ Deliberate (intention to create legal relations is present) ◦ Supported by mutual consideration An Agreements • The parties must be in agreement, that is, have reached a consensus as to their rights and obligations • This agreement takes the form of offer and acceptance Offer Definition of Offer • Offer: Apromise to perform specified acts on certain terms Certainty of Offer • only a complete offer can form the basis of a contract • Means that 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 parties intend to have a contract, the courts will endeavor to interpret the alleged offer in as reasonable a fashion as possible and thereby resolve ambiguities • An offer can achieve the requisite standard of certainty even if it leaves certain matters to be decided in the future Invitation to Treat • An offer is different from a communication that merely expresses a wish to do business • In law, the latter form of communication is called an invitation to treat and has no legal consequences • Whether a communication is an offer or an invitation to treat depends on the speaker's intention, objectively assessed • Invitation to Treat: An expression of willingness to do business • 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, no contract could arise ◦ 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 obligation ◦ Display of a product in the store is not an offer by the store to sell ▪ simply an indication that a product is available and can be purchased ▪ it is invitation to treat and, by definition, is not capable of being accepted • Some contracts are only formed after protracted discussions • Other contracts, like the purchase of photocopying paper from an office supply store, are formed without any negotiations whatsoever • Standard Form Contract: A“take it or leave it” contract, where the customer agrees to a standard set of terms that favors the other side ◦ Sales and rental businesses frequently require their customers to consent to a standard of terms that have been developed by the business over years of operation ◦ Examples: Renting a car and borrowing money from the bank ◦ Not inherently objectionable, however, since they help reduce transaction costs and increase business volume, potentially lowering price ◦ Regardless of whether bargaining precedes the contract or not, the law expects people to take care of themselves ◦ When negotiations are complicated, it is important for the parties to know when an offer has been made, since at that moment significant legal consequences arise ◦ Afundamental rule is that a contract is formed only when a complete offer is unconditionally accepted by the other side ◦ Key factor in deciding whether an offer has been made is this: ▪ 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 • Offeror: The person who makes an offer • Offeree: The person to whom an offer is made Termination of Offer • An offer can be accepted only if it is “alive”, meaning that 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 events: ◦ revocation ◦ lapse ◦ rejection ◦ counteroffer ◦ death or insanity Revocation • Revocation: The withdrawal of an offer • The offeror can revoke his offer at any time before acceptance simply by notifying the offeree of its withdrawal • An offer that has been revoked does not exist anymore and therefore cannot be accepted Case: Bigg v. Boyd Gibbins Ltd • The purpose of entering into a contract, parties may negotiate considerably • Difficulties arise when one party believed that a contract has been concluded while the other party disputes that conclusion • Plaintiff and defendant negotiated extensively for the purchase and sale of real estate by the plaintiff to the defendant. • The negotiation over this property took the form of correspondence that the plaintiff/vendor claims culminated in a contract • Situation: The defendant denies a contract was formed, asserting that the parties had merely agreed on price • Resolution: The court found for the plaintiff. There was a contract for the purchase and sale of the property. To reach this conclusion, the court carefully analyzed the correspondence provided and acknowledged the defendant's argument that agreement on price does not necessarily mean that the parties have reached a full agreement. However, a contract did exist.As the court concluded “ The impression conveyed to my mind by these letters, and indeed the plain impression, is that the language used was intended to and did achieve the formation of a contract. As I have indicated, in the last letter stress was laid on the phrase “accepting my price on $26 000 for the sale of the property”. I think, in the context of the letters that preceded that, it is to be read, as I have said “as accepted by my offer to sell the property at that price”. 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 the 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 • One way to avoid application of the rule in Dickinson v. Dodds that firm offers can be revoked prior to their deadlines is for the parties to form an option agreement • OptionAgreement: An agreement where, in exchange for payment, an offeror is obligated to keep an offer open for a specified time. ◦ An option agreement is a separate contract that may or may not lead to the acceptance of the offer and a resulting agreement of purchase and sale ◦ Its purpose is simply to give the offeree a guaranteed period of time within which to deliberate whether to accept the offer or not ◦ If the offeror withdraws the offer before the option agreement permits, the individual has committed a breach of contract and the offeree can sue for damages ◦ Option 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 Case: Dickinson v. Dodds • This case is the leading decision – valid even today – on whether an offeror can renege on a commitment to hold an offer open for a specified period of time • Problem: Dodds delivered to Dickinson a written offer to sell his property to Dickinson for $800. The offer stated that it would be open for acceptance until 9 a.m. On Friday, June 12. On Thursday, Dickinson heard that Dodds had been offering or was agreeing to sell the property to Mr.Allan. That evening, Dickinson delivered an acceptance to the place where Dodds was staying, and at 7 a.m. On Friday morning – a full two hours before the deadline – he personally delivered an acceptance to Dodds. Dodds declined the acceptance, stating: “You are too late. I have sold the property.” Dickinson sued Doods, alleging there was a contract between them. • Resolution: The court decided that what Dodds did was permissible: “It is a perfectly clear rule of law... that, although it is said that the offer is to be left upon until Friday morning at 9 o'clock, that did not bind Dodds. He was not in point of law bound to hold the offer over until 9 o'clock on Friday morning.” On this footing, a firm offer can be revoked at anytime before acceptance because the offeree has not provided any consideration to support the offeror's implicit promise not to revoke before the deadline. More controversially, the court also held that Dodds' offer had been effectively revoked prior to acceptance because Dickinson learned in advance – from a presumably reliable source – that Dodds was selling the property to someone else. OVERALL DODDS WON. • This case shows that an offer does not have to be directly revoked by the offeror – that revocation can take place through a reliable third-party source Revocation in the Context of a Tendering Contract • Aspecialized set of rules governs the tendering process • When an owner wishes to secure competitive bids to build a large project, it typically calls for tenders • Contractors (also known as tenderer) submit tenders 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 in R. v. Ron Engineering Construction Ltd., devised a new legal structure for how tenders are to be understood • Instead of regarding the call for tenders as an invitation to treat, the Supreme Court of Canada said that the call for tenders was an offer of a preliminary contract known as ContractA • ContractAtypically 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 ContractAto govern the relationship as well as offering to enter into Contract B • Contract B refers to the larger contract to perform the work in question • While there would be as many ContractA's as there were tenderers, only the successful tenderer would enter without 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 ContractAand subject to legal action by the owner • If tenderer refuses to enter into Contract B when chosen to do so, it has committed another breach of ContractA Lapse • Lapse: The expiration of an offer after a specified or reasonable period • After this date, it is no longer “alive” and therefore cannot be accepted • If the offer contains 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 • Ajudge will bring as much precision as possible to the question of when an offer lapses, but the whole exercise is inherently speculative • An offeror should consider specifying an expiry date for the offer and thereby avoid the debate altogether • The offeree should act promptly, because of the principle in Dickinson v. Dodds permitting revocation prior to the expiry date, or at least keep in contact with the offeror to ensure that the status of the offer is known. Rejection • Rejection: Arefusal to accept an offer • The offer can be accepted only if the offeror revives it by offering it anew or if the offeree presents it as his own offer, which can then be accepted or rejected by the original offeror • The risk in rejecting an offer is that it may never be renewed by the other side Counteroffer • Counteroffer: The rejection of one offer and proposal of a new one • Through a counteroffer, the offeree is turning down the offer and proposing a new offer in its place • The distinction between an acceptance and a counteroffer is not always readily apparent • Any change to a term of 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 by one of the parties ◦ Whenever a party makes a counteroffer, he or she jeopardizes the chance of being able to accept the original offer Death or Insanity • While the matter is not free from controversy, it would seem that an offer generally dies if the offeror or offeree dies • 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 notwithstanding that party's death • Someone who makes an offer and then subsequently becomes insane would not be bound, as general rule Acceptance Definition of Acceptance • Acceptance: An unqualified willingness to enter into a contract on the terms in the offer • When an offer made by one party is unconditionally and unequivocally accepted by the other party, a contract is formed • If the purported 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 entirety • This message of acceptance can be conveyed in any number of ways: in person, in writing, by mail, by fax, by e-mail, by telephone, and by other actions • Any manner of communication that is reasonable in the circumstances ordinarily will do • 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 • Since entering a contract is about assent, the law determines that the offer is effective only when it has been communicated to the offeree • The offeree becomes aware of its terms and can respond • The acceptance, if any, must be communicated to the offeror so that the offeree accepts in person or sends a message through some medium to the offeror • It is possible for the offer to be expressed in such a way that no communication of acceptance is needed • Communication of acceptance is expected and required • The offeror needs to be aware of of the acceptance in order to appreciate that the contract exists and that performance of the obligations in it should proceed • A problem arises if the offeree sends an acceptance that for some reason never reaches the offeror • Acceptance is effective only when communicated – it is at this moment that a contract comes into existence • Aspecific exception to this general rule is the “postbox rule” also called the “postal rule” • If it is clear that the offeror intends the postbox rule to apply to her offer, then acceptance is effective at the time of mailing the acceptance, rather than the time of delivery • Since application of the postbox rule means that an offeror could end up being in a contract without even knowing it, that person is best advised to avoid application of the postbox rule by making it clear in the offer that actual communication or notice of acceptance is absolutely required • When a court will apply the “ordinary rule” which requires communication of acceptance and when it will apply the “postbox rule” depends on the facts of the case • Courts have suggested that the postbox rule applies to telegrams but only where the offeror had impliedly constituted the telegraph company as his agent for the purpose of receiving the acceptance ◦ Otherwise, the ordinary rule applies and the acceptance by telegram is effective only upon receipt ◦ The postbox rule has also been applied where the acceptance was delivered by courier • It is more common for the courts to apply the ordinary rule – that acceptance is effective only when communicated • Oral agreements are very difficult to prove without some independent verification or corroboration – by a witness to the negotiations Case: Lowe Ltd. v. Upper Clements Family Theme Park Ltd. • Businesses often have to act quickly to address a problem that has developed • Proper attention may not be given to the legal requirements of contract formation • Lack of focus can lead to disappointed expectations • Problem: Mr. Bougie, construction manager of Upper Clements Family Theme Park, was under a tight construction schedule and needed a crane quickly to complete construction of a theme park. He discussed leasing a crane from Mr.Lowe's company, but the two men could not come to an agreement. Lowe insisted that the crane be leased for a minimum period of two months, whereas Bougie did not want to commit to that length of a term, preferring to prorate charges based on a monthly rental. Bougie sent a letter to Lowe. Lowe apparently believed that he and the theme park personnel could come to an agreement on price, and within two days of delivering the crane, approached Bougie with a draft agreement setting out a monthly rate for a two-month term. Bougies said that he had no authority to deal with the document and it would have to wait for Buxton's return from an out-of-town trip. In the end, the theme park had
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