George Mason School of Law
Contracts I
XI. Irrevocable Offers
F.H. Buckley
[email protected]
1
The shape of things to come
 Consideration barriers cleave off
some kinds of unenforceable
contracts, but other promises which
lack consideration are nevertheless
enforceable
2
The shape of things to come
 Promissory Estoppel
 Option Contracts
 Relational Contracts
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3
Agreements to Agree
Preliminary Agreements
Indefiniteness
Output Contracts
Requirement Contracts
Distributorships, Franchises
Irrevocable Offers
 The consideration requirement
amounts to a presumption against
irrevocable offers
 Why does this make sense?
4
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?
5
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)
6
Irrevocable Offers
 What purposes are served by option
contacts?
7
Irrevocable Offers
 What purposes are served by option
contacts?
 Hedging strategies to diversify risk
8
Irrevocable Offers
 What purposes are served by option
contacts?
 Compensation schemes for
executives (pay for performance)
9
Irrevocable Offers
 What purposes are served by option
contacts?
 Land assembly and hold-outs
10
Hold outs: 433 Mass Ave. NW
11
Irrevocable Offers
 So what about options supported by
consideration?
 What if I pay for the option to buy gold
at $2,000/oz. in a year?
12
Irrevocable Offers
 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.
13
Irrevocable Offers
 When would it make sense to hold an
offer irrevocable in the absence of
consideration?
14
Irrevocable Offers
 When would it make sense to hold an
offer irrevocable in the absence of
consideration?
 Pre-contractual reliance
expenditures
 Firm Offers
15
Reliance Expenditures
 The Brooklyn Bridge example: p. 233
16
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)
17
Reliance Expenditures
 Revocation not effective after full
performance of unilateral contract
 St. Peter
 Lefkowitz
18
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)
19
Acceptance:
Restatement § 62(1)
 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.
20
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.
21
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.
22
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.
23
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.
24
What is the remedy?
 Cf. Restatement § 87, Comment e
 “Full scale enforcement is not necessarily
appropriate.”
25
Firm Offers
 What about cases where there is
neither consideration nor reliance?
26
Firm Offers
 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.
27
Firm Offers
 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
28
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.
29
Compare to the Restatement
 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.
30
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.
31
Firm offers: Construction Contracts
Client
General Contractor
Sub-contractor
32
Pavel v. Johnson p. 236: Building 30
33
Pavel v. Johnson p. 234
NIH
PEI (Pavel/HVAC)
Johnson (Kick)
Was this an Article 2 transaction?
34
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
35
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
36
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
37
Pavel v. Johnson
 Was there a contract between Pavel
and Johnson?
38
Pavel v. Johnson
 Should subcontractors be held to
have made an irrevocable offer?
39
Pavel v. Johnson
 Should subcontractors be held to
have made an irrevocable offer?
 Baird v. Gimbel (Learned Hand)
 Drennan v. Star Paving (Trainor)
40
Pavel v. Johnson
 Should subcontractors be held to
have made an irrevocable offer?
 When might this be unfair to the
subcontractor?
41
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
42
Pavel v. Johnson
 On the facts of this case, should the
subcontractor be permitted to revoke
the bid?
43
Pavel v. Johnson
 On the facts of this case, should the
subcontractor be permitted to revoke
the bid?
 Did Pavel shop around?
44
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
45
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
46
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?
47