Contracts
Class Notes
You
want to buy up a big tract of land, but you’re not ready to commit because it’s
a big ticket purchase. But you don’t
want the prospective seller to sell to anyone else or change his mind. How can we get an irrevocable offer to sell
in
Firm
offers
How
do we get a firm offer? We could
pay something for the offer. If it’s
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. That’s a good way to do it! That’s the way most professionals would do
it.
What
other ways may be open to you? We don’t
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 doesn’t
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.
§
2-205 wouldn’t apply to this situation because it’s for goods. This is a way to get a firm offer
without paying for it in some situations.
§ 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 – not
a preliminary negotiation. It’s gotta be an offer.
2. The offeror
must be a merchant as defined in Article 2. Consumers and other schmoes
and non-professionals can’t make firm offers under this section.
3. It must be to
buy or sell goods.
4. It has to be
an assigned writing. You can’t
make an oral firm offer even if you’re a merchant and even if it’s to
buy or sell goods.
5. It must give
assurance, by its terms, that it will be held open and that the offer isn’t 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 § 2-205 and the sale of goods.
In particular, there’s a statute in
What
are some other ways to get a firm offer?
What
if the offer recites a “purported” consideration? Sure, that’s fine, at least some places. You can recite a lie to make the offer firm,
at least according to the Restatement § 87. But don’t rely on this anywhere, except if it’s
been considered by that state’s Supreme Court.
We
might be a little wary about using this technique.
We’re
only taking about consideration for a promise to hold an offer open. We’re not talking about consideration for a
full promise.
You
don’t want to second-guess. You don’t
want to have to litigate the terms. It’s
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 it’s fair or not. Stay away from this! Pay some real dollars, enough to
concentrate the offeror’s mind and enough to convince
any third party that it’s not a sham or a fake.
Don’t go for less than $500.
When
you pay someone to commit to a firm offer, you’re paying them to really give up
something that has value.
It’s
common in this kind of an option to provide that the consideration will go
towards the final purchase price.
A
lot of courts don’t like the position that offers are by nature revocable. Some courts make it easy to evade that. Other courts find that it’s useful to be able
to revoke a promise.
This
isn’t a situation where it’s 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
We offer floor tile for $357,000, offer to lapse
three days after the award of the prime contract.
Let’s
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 “$537,000”, not “$357,000”. General says, “You revoke? We accept?”
Has General got a contract under these circumstances?
There
are several different views: Hand’s, Traynor’s, and
the Restatement view. What’s another view
to think about in terms of the hypothetical?
What’s another way the general contractor may get some help? Not everyone will buy the Traynor
position as written in § 87(2).
Aha! You have material in the hypothetical…it’s a
straight sale of goods! We can look at
the UCC!
Would
§ 2-205 result in a firm offer in the hypo?
No…why not? It doesn’t have a
separately signed form with assurance of holding the offer open for a certain
period of time. The offer doesn’t assure
that that it won’t be revoked. If there’s
no assurance, you don’t have a § 2-205 firm offer.
James Baird Co. v. Gimbel Bros.
What
would Hand say? He says there’s 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 doesn’t think it applies because he can’t
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 wasn’t
supported by consideration.
The
most famous line in all these cases is “in commercial transactions, it does not
in the end promote justice to seek strained interpretations in aid of those who
do not protect themselves.” Hand says it’s
usually a bad idea to find by implication or some strained interpretation
something to protect someone who has the wherewithal to protect themselves but
doesn’t do it.
When
the parties are big and strong and able to protect themselves, we’re 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 it’s not a good idea to rely on an
offer as opposed to waiting to do your serious relying for when you have a contract. Don’t 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 § 2-205 at the time, this case might have come out differently.
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? It’s not really a
promise.
How
does Traynor find the offer to be irrevocable? Traynor must give
the general something to rely on. It’s
an implied subsidiary promise.
What’s 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 §
2-205 couldn’t apply. Also, the bid here
was oral. § 2-205 is only a possibility
when there are goods involves and there is a written and signed offer.
One
result of Drennan
is § 87(2) of the 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.
In
this particular interest, there may be reliance before acceptance. This is one of the few situations where §
87(2) will have application.
This
section restates and simplifies the Traynor decision
in Drennan.
In
both cases, you don’t have sufficient assurance to get § 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 “squiddley-squat” 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 doesn’t seem to make sense, given the
nature of the business, to make subs’ offers irrevocable.
Where
does that leave us?
Suppose
that in light of Drennan
and Restatement § 87(2) that § 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 can’t snap up an offer that’s too good to be true. If you see mismarked
goods at the store, if you know it’s a mistake then you can’t snap it up. You can’t get a contract out of that. Let’s assume, as Traynor
did, that there’s enough variation in subs’ bids that the offer isn’t too good
to be true on its face. How do you argue
that the subs’ offer should be revocable?
The
thing is, in the hypothetical, it’s a $357,000 component in a $47 million
job. That suggests that the reliance on the
sub is not of a substantial character. It’s a piddley
little part of the total big contract!
It’s less than one percent of the total thing!
A
general contractor doesn’t make its own bid by adding up estimates from
subs. The general “uses” the sub’s 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. There’s more to that than
adding up subs’ bids.
If
you’re not in
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 § 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.