1 George Mason School of Law Contracts I XI.Irrevocable Offers F.H. Buckley [email protected].
Dec 26, 2015
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The shape of things to come
Consideration barriers cleave off some kinds of unenforceable contracts, but other promises which lack consideration are nevertheless enforceable
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The shape of things to come
Promissory Estoppel Option Contracts Relational Contracts
Agreements to Agree Preliminary Agreements Indefiniteness Output Contracts Requirement Contracts Distributorships, Franchises
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Irrevocable Offers
The consideration requirement amounts to a presumption against irrevocable offers Why does this make sense?
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Irrevocable Offers
Gold is now trading at $1300/oz. Would you pay for the right to buy gold for $2000/oz. in a year’s time?
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Irrevocable Offers
Gold is now trading at $1300/oz. Would you pay for the right to buy gold for $2000/oz. in a year’s time?
Is there a positive probability p that the price of gold will be $X, where X > $2000/oz.?
Voption = p($X – 2,000)
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Irrevocable Offers
What purposes are served by option contacts?
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Irrevocable Offers
What purposes are served by option contacts?
Hedging strategies to diversify risk
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Irrevocable Offers
What purposes are served by option contacts?
Compensation schemes for executives (pay for performance)
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Irrevocable Offers
What purposes are served by option contacts?
Land assembly and hold-outs
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Hold outs: 433 Mass Ave. NW
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Irrevocable Offers
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So what about options supported by consideration? What if I pay for the option to buy gold at
$2,000/oz. in a year?
Irrevocable Offers
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So what about options supported by consideration?
Restatement § 25. An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer.
Irrevocable Offers
When would it make sense to hold an offer irrevocable in the absence of consideration?
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Irrevocable Offers
When would it make sense to hold an offer irrevocable in the absence of consideration?
Pre-contractual reliance expenditures
Firm Offers
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Reliance Expenditures
The Brooklyn Bridge example: p. 233
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Reliance Expenditures
In a unilateral contract, offeree does not have to communicate acceptance, only to begin performance
Carlill v. Carbolic Smoke Ball Restatement § 54(1)
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Reliance Expenditures
Revocation not effective after full performance of unilateral contract
St. Peter Lefkowitz
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Reliance Expenditures
But what about part performance? Easy loss of revocation rights? Ever-Tite Acceptance: Restatement § 62(1) Option Contract: Restatement §§ 45(1),
87(2)
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Acceptance: Restatement § 62(1)
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Where an offer invites an offeree to choose between acceptance by promise and acceptance by performance, the tender or beginning of the invited performance or a tender of a beginning of it is an acceptance by performance.
Option Contract:Restatement § 45(1)
Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.
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Option Contract:Restatement § 87(2)
An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
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What does § 45(1) add to 87(2)?
Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.
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What does § 87(2) add to § 45(1)?
An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.
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What is the remedy?
Cf. Restatement § 87, Comment e “Full scale enforcement is not necessarily
appropriate.”
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Firm Offers
What about cases where there is neither consideration nor reliance?
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Firm Offers
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Restatement § 87(1)(a) An offer is binding as an option contract if it is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time.
Firm Offers
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Restatement § 87(1)(a) An offer is binding as an option contract if it is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time. What would a “purported consideration”
look like? Cf. Restatement comments
Firm Offers under the UCC
UCC § 2-205. An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
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Compare to the Restatement
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Restatement § 87(1)(a) An offer is binding as an option contract if it is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time.
Firm Offers under the UCC
UCC § 2-205. An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
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Firm offers: Construction Contracts
Client
General Contractor
Sub-contractor
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Pavel v. Johnson p. 236: Building 30
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Pavel v. Johnson p. 234
NIH
PEI (Pavel/HVAC)
Johnson (Kick)
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Was this an Article 2 transaction?
Pavel v. Johnson
Aug. 5: Subcontractor Johnson submits a $898K bid for the HVAC work
Aug. 26: Contractor Pavel asks Johnson for fresh bid breaking out Powers project
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Pavel v. Johnson
Aug. 5: Subcontractor Johnson bids Aug. 26: Contractor Pavel asks Johnson
for fresh bid breaking out Powers project Sept. 1: Pavel “accepts” Johnson’s bid Sept. 1: Johnson notes an error and
seeks to withdraw bid
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Pavel v. Johnson
Aug. 5: Subcontractor Johnson bids Aug. 26: Contractor Pavel asks Johnson
for fresh bid breaking out Powers project Sept. 1: Pavel “accepts” Johnson’s bid Sept. 1: Johnson notes an error and
seeks to withdraw bid Sept. 28: NIH awards contract to Pavel Subsequently Pavel finds a substitute
subcontractor
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Pavel v. Johnson
Was there a contract between Pavel and Johnson?
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Pavel v. Johnson
Should subcontractors be held to have made an irrevocable offer?
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Pavel v. Johnson
Should subcontractors be held to have made an irrevocable offer? Baird v. Gimbel (Learned Hand) Drennan v. Star Paving (Trainor)
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Pavel v. Johnson
Should subcontractors be held to have made an irrevocable offer? When might this be unfair to the
subcontractor?
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Pavel v. Johnson
Should subcontractors be held to have made an irrevocable offer? When might this be unfair to the
subcontractor? The contractor shops around? Lapse of time and absence of notice to
subcontractor Extremely low bid by subcontractor
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Pavel v. Johnson
On the facts of this case, should the subcontractor be permitted to revoke the bid?
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Pavel v. Johnson
On the facts of this case, should the subcontractor be permitted to revoke the bid? Did Pavel shop around?
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Pavel v. Johnson
On the facts of this case, should the subcontractor be permitted to revoke the bid? Did Pavel shop around? Subcontractor took some time to revoke
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Pavel v. Johnson
On the facts of this case, should the subcontractor be permitted to revoke the bid? Did Pavel shop around? Subcontractor took some time to revoke Counteroffer by contractor
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Pavel v. Johnson
On the facts of this case, should the subcontractor be permitted to revoke the bid? Which party is in the best position to
assume the risk that the contractor will find a cheaper subcontractor?
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