Contracts Class Notes 1/20/04

We haven’t heard the end of the controversy over cases like Zeidenberg and Hill. These cases are controversial. Easterbrook’s decisions seem to have been followed so far.

What can be said for his decisions? They deal with a convenient way of making decisions and they make sense to some extent.

When a consumer enters into a “deal now, terms later” deal, and the later terms don’t eviscerate the earlier deal and are reasonable, then the consumer will be bound by them. If all those factors are not present, there will be a different result.

Next, we’re dealing with other contract formation matters.

Offer, rejection, and revocation by mail

Two parties communicate between each other at some distance. The communications go through the mail or something similar. There are going to be inevitable delays which aren’t present when the parties negotiate face to face. When you’re face to face or on the phone, the delay between getting the message out and having the message received is pretty much zero. When you operate through the mail, the letter will travel for a certain amount of time, which will create problems. How will the law deal with this?

When is an offer effective when it’s in writing, signed by the offeror, and mailed to the offeree? It is effective when the offeree receives it. Check out part of the opinion. There’s a long inset quotation from Corbin. “An offer by mail creates no power of acceptance until it is received.” Offers are effective upon receipt. It’s not rocket science, all the rule says is that you can’t accept an offer you don’t know about.

Say we have a mailed offer to sell land. Say the offer is mailed on Saturday but received on Monday. Then the offer is effective on Monday. On Tuesday, we have a revocation of the offer by the offeror. Let’s say the revocation is dispatched on Tuesday and it’s received on Thursday. When is the revocation effective? It’s effective on receipt. It would be unfair to the offeree to have the revocation effective before the offeree receives it. This is a case of objective mutual assent.

The offeree gets an offer on Monday. It looks like an offer, smells like an offer, and sure enough is an offer which gives the offeree the power of acceptance. Now the offeror starts thinking about revocation. At this point, we cannot have any subjective meeting of the minds, but we will have objective meeting of the minds when the revocation arrives.

Revocation is effective on receipt, not on dispatch. For simple authority, try Restatement § 42: “An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.”

So in our hypothetical, the revocation is effective upon its receipt on Thursday.

What about rejection? Say the offer is received on Monday and on Tuesday the offeree rejects the offer. Then on Wednesday, the offeree changes his mind and wants to accept instead. Say his rejection is received on Thursday. Will he get a contract? When will a rejection be effective?

Restatement § 38 says that rejection terminates the offeree’s power of acceptance. But when did the offeree effectively reject? When is the rejection effective? “Rejection or counter-offer by mail or telegram does not terminate the power of acceptance until received by the offeror…” Restatement § 40.

Rejection terminates the power of acceptance, but why? The legal consequence of rejection lies in the probable effect on the offeror. If the offeree states that he declines the offer, it’s very likely that the offeror will change his plans. The offeror can’t change his plans until he’s aware of the rejection.

Offer, rejection, and revocation are all effective upon receipt. However…

Acceptance is effective on dispatch – the mailbox rule

Say in our prior hypothetical that the offer is received on Tuesday and an acceptance is dispatched on Wednesday. Say then that on Thursday a revocation is received by the offeree, while the acceptance is received by the offeror on Friday. Is there a contract or not? Yes. The contract becomes effective when the acceptance is dispatched by the offeree.

This is the rule of Adams v. Lindsell. We need to know what this case stands for by name. It stands for the mailbox rule.

Acceptance is effective when you put it in the mailbox. When you drop your acceptance in the mailbox, a contract is created. Acceptance can be effective on dispatch. But why is that our law? It is a rare and different thing that acceptance is effective on dispatch.

What does Corbin have to say? He says that you’re making a choice to burden either the offeror or the offeree. The mailbox rule places a greater burden on the offeror and gives the offeree an advantage. We could do it the other way around and, in fact, in the rest of the world, it is done the other way around. So why do we do it the way we do? Basically, it’s just because of the precedent of Adams v. Lindsell. It’s not bad. On balance, the scales may tip that way, or maybe they don’t.

What can you say in favor of the choice we’ve made? First, we need a rule. Either rule is better than no rule. No rule invites lots of litigation and decisions made on the equities. You would have lots of hard cases. So we need a rule. What argues for going in the direction in which we go? The offeror starts the process. The offeree wants and arguably needs a firm basis for knowing whether or not there’s a contract at the time he drops his acceptance in the mailbox.

However, there’s an exception. There are these two U.S. Court of Claims cases involving the federal government. When the federal government is in the picture and we’re in the Court of Claims, we have the acceptance on receipt rule. But that’s different than private party contract claims.

What if the acceptance is delayed or lost in the mail? That’s a contract anyway. The offeror might have a problem with it, but too bad.

Restatement § 63 says that we won’t qualify “acceptance effective on dispatch” for the sake of convenience. Even if the post office screws up and delays or loses the acceptance, there will be a contract. How do you prove you mail something that the post office lost? You testify that you did. “Sometimes liars win.” It will be a question of fact.

Check out § 1-201 (26), which says “A person ‘receives’ a notice or notification when (a) it comes to his attention; or (b) it is duly delivered at the place of business through which the contract was made or at any other place held out by him as the place for receipt of such communications.”

Some of these things are arbitrary, but we need rules, and these do make a certain amount of sense.

Notice there is an exception for option contracts (irrevocable offers). Acceptance (or exercise of the offer) is only effective on receipt. It need not be effective on dispatch when the offeror is disabled from revoking.

Morrison v. Thoelke

The offerors are purchasers of land. The land is in Florida and the offerors who want to buy it are also in Florida. The offerees are in Texas. The offer is made in a pretty good way. The purchasers draft a contract, sign it, and send it to the offerees along with a letter inviting acceptance having the vendors sign the contract too. They do so. Acceptance is effective on dispatch, though it takes a couple of days for the acceptance to travel through the mail on the way from Texas to Florida. During this period, the vendors decide it was a bad idea to accept. So they telephone Florida to try to repudiate their own acceptance. The court in this case says you can’t do that. The court says that the contract is created upon dispatch. The court says that since this is a contract for the sale of land, specific performance is called for.

Why did the court do that? Before the offeror knew that the acceptance had been dispatched, they were told that the offerees had changed their mind. What’s wrong with letting the offerees do that? The problem is that it would let the offerees create their own option contract. If you had the opposite rule, the vendors would have an unbargained-for option. If the acceptance isn’t effective until receipt, then the offerees have an unpaid-for option that it’s not fair for them to have.

Instead, if you put your acceptance in the mail and then revoke before it arrives, your revocation operates as a repudiation of an existing contract. On the other hand, if the offeror doesn’t want a contract possibly because the offeror relies on the rejection that beats the already-dispatched acceptance, then the offeror should not be stuck with a contract against the offeror’s wishes. One way for the offeror to deal with that would be to say that the offeree has accepted and then totally breached the contract.

But how realistic, in business terms, is this risk of an unbargained-for option? Is the rule all that justified in this situation? It’s debatable. The justification for the rule is a good deal less clear then it is in the situation of the “crossing revocation and acceptance”.

What kind of acceptance does an offer invite? § 65 says a medium of acceptance is reasonable and thus invited by the offer if it is the same as the one used by the offeror. If the offer is mailed to the offeree, for example, then that invites a mailed acceptance and triggers the mailbox rule. Similarly, if the offer is telegraphed, that invites a telegraphic acceptance which will be effective when it is put in the hands of the telegraph company.

If the offer is FedEx’d to the offeree, that invites a FedEx acceptance.

In any case, to have an acceptance effective on dispatch, it must be properly addressed. If the address is messed up, the acceptance will be effective on receipt, if it’s ever received. The acceptance must also have correct postage in order to be effective on dispatch. All fees for transit must also be paid.

What about a hand-delivered written offer? Say the offeror and offeree get together in the office of the offeror’s lawyer, where the offer is hand-delivered. Say the offeree and his lawyer go to their office to chat. If they mail their acceptance, will it be effective on dispatch? Probably not, because that wasn’t the invited method of acceptance. You would have to hand-deliver the acceptance back. When you hand-deliver, the acceptance is technically in your possession until it’s received.

There has been a right by statute for some time to get back a letter that you’ve already put in the mail. But in practice, this is next to impossible. So you can fish a letter out of the mail, but that won’t change the mailbox rule. But with your own employee as a messenger, if you send them out to deliver an acceptance then you can call them right up to the last minute and tell them to skip it.

The mailbox rule imposes a burden on the offeror. What do you do about that if you’re an offeror? Notice the beginning phrase of § 63: “Unless the offer provides otherwise…” The offeror is still the master of the offer!

Consider Kibler v. Caplis. How do you explain it? Did the offer in this case negative the mailbox rule? What other issues are raised? Look at the problem on pp. 444-445.

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