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George Mason School of Law

Contracts I

XI. Irrevocable Offers

F.H. Buckley

fbuckley@gmu.edu

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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