Contracts Class Notes 11/20/03


You want to buy up a big tract of land, but youíre not ready to commit because itís a big ticket purchase.But you donít want the prospective seller to sell to anyone else or change his mind.How can we get an irrevocable offer to sell in Ohio, where we donít have the seal?In Thomason v. Bescher, they had an offer under seal.


Firm offers


How do we get a firm offer?We could pay something for the offer.If itís land, we have the statute of frauds.We need the offer in writing, signed by the vendor, and we want it to recite that it will be held open and not revoked until a certain date.Then you pay money to get that writing.Thatís a good way to do it!Thatís the way most professionals would do it.


What other ways may be open to you?We donít want to let the vendor off by paying some kind of liquidated damages.We want a contract that will be specifically enforceable.If there are liquidated damages, it doesnít automatically make a remedy at law adequate.But if we put that in, it makes specific performance questionable.It makes it seem like maybe you could be made whole with money.


ß 2-205 wouldnít apply to this situation because itís for goods.This is a way to get a firm offer without paying for it in some situations.


ß 2-205. Firm Offers


An offer by a merchant to buy or sell goods in a signed writing which by its terms give 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.


This one bristles with elements.You need:


1.     An offer Ė not a preliminary negotiation.Itís gotta be an offer.

2.     The offeror must be a merchant as defined in Article 2.Consumers and other schmoes and non-professionals canít make firm offers under this section.

3.     It must be to buy or sell goods.

4.     It has to be an assigned writing.You canít make an oral firm offer even if youíre a merchant and even if itís to buy or sell goods.

5.     It must give assurance, by its terms, that it will be held open and that the offer isnít revocable.


The drafters wanted to protect offerors and they wanted to protect the common law view that offers are generally revocable.They made it kind of tough to make offers irrevocable.


E.A. Coronis Associates v. M. Gordon Constr. Co.


This deals with ß 2-205 and the sale of goods.In particular, thereís a statute in New York that provides for firm offers.Donít rely on an ďold soldierĒ of a statute that hasnít been recently construed.


What are some other ways to get a firm offer?


What if the offer recites a ďpurportedĒ consideration?Sure, thatís fine, at least some places.You can recite a lie to make the offer firm, at least according to the Restatement ß 87. But donít rely on this anywhere, except if itís been considered by that stateís Supreme Court.Pennsylvania uses this, though Idaho has dinged it as bogus.It bases consideration on a false recital, and some people just donít like lies.


We might be a little wary about using this technique.


Weíre only taking about consideration for a promise to hold an offer open.Weíre not talking about consideration for a full promise.


You donít want to second-guess.You donít want to have to litigate the terms.Itís easier to make things binding if you use genuine consideration.Then the basic law is that the courts will enforce the bargain the parties made without judging whether itís fair or not.Stay away from this!Pay some real dollars, enough to concentrate the offerorís mind and enough to convince any third party that itís not a sham or a fake.Donít go for less than $500.


When you pay someone to commit to a firm offer, youíre paying them to really give up something that has value.


Itís common in this kind of an option to provide that the consideration will go towards the final purchase price.


A lot of courts donít like the position that offers are by nature revocable.Some courts make it easy to evade that.Other courts find that itís useful to be able to revoke a promise.


This isnít a situation where itís wise to be cheap: if you want a firm offer, pay up.You may get what you pay for.


A hypothetical on James Baird and Drennan v. Star Paving Co.


On October 1st, the state of Ohio let bids for a law school addition across the street that will have lots oí parking and a nice dorm and all that good stuff.The state published all the plans and specs and put them out for the contracting community to look at.The last time they were taking bids was last Friday the 14th at 5:00 PM.At 4:59 PM, General Contractor submitted a bid for $47,000,000.At 3 PM on the 14th, things were frantic.All kinds of subcontractors were calling in bids on various pieces and parts of the job.At 3 PM, Floor Tile Company hand-delivered a signed offer that said:


We offer floor tile for $357,000, offer to lapse three days after the award of the prime contract.


Letís say General used that bid to help put together the $47 million bid.General won the contract!!!Yay!


This morning, General was getting ready to accept the bid for the $357,000 worth of floor tile when it got a call from Floor Tile: they revoke!They meant to say ď$537,000Ē, not ď$357,000Ē.General says, ďYou revoke?We accept?ĒHas General got a contract under these circumstances?


There are several different views: Handís, Traynorís, and the Restatement view.Whatís another view to think about in terms of the hypothetical?Whatís another way the general contractor may get some help?Not everyone will buy the Traynor position as written in ß 87(2).


Aha!You have material in the hypotheticalÖitís a straight sale of goods!We can look at the UCC!


Would ß 2-205 result in a firm offer in the hypo?NoÖwhy not?It doesnít have a separately signed form with assurance of holding the offer open for a certain period of time.The offer doesnít assure that that it wonít be revoked.If thereís no assurance, you donít have a ß 2-205 firm offer.


James Baird Co. v. Gimbel Bros.


What would Hand say?He says thereís no contract because what happened here was that the offer was revoked before the general contractor accepted.Hand would say this is like Petterson.Hand is big on the whole revocable offer thing.


Hand recognizes promissory estoppel, but he doesnít think it applies because he canít find any promise to hold the offer open.No express promise was made in either case.If there were one, he suggests, there might be enough reliance on that promise to enforce it even though it wasnít supported by consideration.


The most famous line in all these cases is ďin commercial transactions, it does not in the end promote justice to seek strained interpretations in aid of those who do not protect themselves.ĒHand says itís usually a bad idea to find by implication or some strained interpretation something to protect someone who has the wherewithal to protect themselves but doesnít do it.


Clovis thinks thatís a great thought that has a lot of utility for a number of commercial situations.


When the parties are big and strong and able to protect themselves, weíre not going to go out of our way to protect them.We might stretch the interpretation and the rules to protect a consumer.


This is a qualification to the general rule that itís not a good idea to rely on an offer as opposed to waiting to do your serious relying for when you have a contract.Donít rely on something that can be pulled out from under you.Are you doing something at your own risk in that situation?


You can see something about that in Ragosta v. Wilder.


If we had ß 2-205 at the time, this case might have come out differently.


Drennan v. Star Paving Co.


What would Traynor say?He would say there was a contract based on promissory estoppel.How does he gets there in the face of the fact that the offer was revoked?Did the general contractor rely to its detriment?What do you need to get reliance?Why should you get anything if you rely on a revocable offer?Itís not really a promise.


How does Traynor find the offer to be irrevocable?Traynor must give the general something to rely on.Itís an implied subsidiary promise.Whatís the promise?The promise is to hold the offer open until the general contractor accepts the big, main contract.Since the subcontractor wants the job, and the subcontractor wants the contractor to use the subcontractor, the offer by the subcontractor is irrevocable until a reasonable time after the general contract is awarded.The general relies on this promise.The general relies on it in putting its bid together.


Traynor destroys the revocability idea that accompanies a regular offer by saying with this special kind of offer, we must turn this into an option contract.


Traynor says that in some circumstances, it does make sense to allow reliance on an offer before acceptance and to make the offer irrevocable because of that reliance.


In this case, doing the paving work will be read as a services contract, and ß 2-205 couldnít apply.Also, the bid here was oral.ß 2-205 is only a possibility when there are goods involves and there is a written and signed offer.


One result of Drennan is ß 87(2) of the Restatement:


ß 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.


In this particular interest, there may be reliance before acceptance.This is one of the few situations where ß 87(2) will have application.


This section restates and simplifies the Traynor decision in Drennan.


In both cases, you donít have sufficient assurance to get ß 2-205 up and running.


Schultz, The Firm Offer Puzzle


Hand and Traynor are good judges.They approach this question through legal analysis.Do they know ďsquiddley-squatĒ about the contracting business?No.Not so far as anyone can tell.Schultz went out and learned about the contracting business to find out how it actually works.He comes back with these conclusions: generals tend to kick subs around.Generals tend to have the upper hand and be big and strong, while subs go out of business frequently.It doesnít seem to make sense, given the nature of the business, to make subsí offers irrevocable.


Where does that leave us?


Suppose that in light of Drennan and Restatement ß 87(2) that ß 87(2) becomes the law.What can we do for the sub in these circumstances?How could we make an argument that a sub has successfully revoked?


Williston has said that you canít snap up an offer thatís too good to be true.If you see mismarked goods at the store, if you know itís a mistake then you canít snap it up.You canít get a contract out of that.Letís assume, as Traynor did, that thereís enough variation in subsí bids that the offer isnít too good to be true on its face.How do you argue that the subsí offer should be revocable?


The thing is, in the hypothetical, itís a $357,000 component in a $47 million job.That suggests that the reliance on the sub is not of a substantial character.Itís a piddley little part of the total big contract!Itís less than one percent of the total thing!


A general contractor doesnít make its own bid by adding up estimates from subs.The general ďusesĒ the subís bid, but then it adds a little profit on.On the other hand, the general is trying to make the bid low enough to beat the competition.Thereís more to that than adding up subsí bids.


If youíre not in California, itís not uncommon for generals to haggle subs down after the prime contract has been awarded.That stuff goes on all the time.Some say itís unethicalÖwho does?Subs do.Who thinks itís a wonderful idea besides general contractors?Taxpayers!If the general is allowed to haggle with the subs after the contract is made, that means the bids will be lower and the price the public pays will be less.You can protect subs the way California does, but you pay the price for it in much higher public job costs.Public job costs are a lot higher than private job costs everywhere, but especially in California.We want to protect the public from all kinds of outrageous deals between contractors and politicians.You get honesty, but you pay the price in inefficiency.


Focus on this: to the extent the general is going to negotiate after getting the prime contract, that suggests little reliance on the part of the general.Even if ß 87(2) is the law, you can frequently make a strong case that there was no significant reliance and that justice does not require any measure of enforcement.


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