The Building Blocks of a Binding Agreement: Offers

Contract Law: Offers

A contract is an agreement that creates obligations between two or more parties that are enforceable by law.[1] Contracts are ubiquitous in our society and can have virtually any subject matter, including real estate, goods, services and intellectual property. There’s a common thread among all contracts, though: they all begin with an offer.

An offer is a promise to do or to refrain from doing something in exchange for another’s promise, action or inaction.[2] An offer is conditioned on the offeree acting, forbearing from something or providing a return promise.[3] It’s step one of a two-step contract-building process, with the second step being the acceptance.[4]

There are three elements to an offer:

(1)   The offer must be communicated to one or more parties;

(2)   The offeror must express an intention to be bound; and

(3)   The offer’s terms must be sufficiently certain and definite.

These elements can be simply broken down into “the three C’s”: communication, commitment, and certainty.[5]

The first element, communication, means that the offeror must communicate his offer to a party who can accept or reject it. As the Restatement (Second) of Contracts provides, “communication to the offeree is of the essence of every offer.”[6] The communication can be oral, in writing or even implied by actions. For example, if, after a snowstorm, a person walks up to your driveway with a shovel and motions to the driveway and you nod in return, the motion could be construed as an offer to shovel for reasonable payment and the nod as an acceptance.

The second element, commitment, differentiates an offer from a mere “invitation to deal” or “invitation to negotiate.” This means that the offeror must show intent to be bound by the offer. Intent to be bound is shown by the conduct and statements of the offeror. The offeror must demonstrate an intention to communicate to the offeree that he is willing to enter into an enforceable contractual relationship should the other party accept.[7]

Advertisements illustrate the difference between offers and invitations for offers. Although advertisement seemingly communicate intention to make a deal or sale, they generally constitute invitations to deal rather than offers because they can’t reasonably be interpreted as intents to be bound.[8] After all, the advertiser can’t reasonably be expecting to owe obligations to every single person who sees the ad.

In one case, the plaintiffs filed a class action against a retailer who sent a direct mail advertisement that said it would provide a free watch to anyone who opens the advertiser’s envelopes.[9] The court affirmed the dismissal of the lawsuit, finding that advertisements aren’t offers, but are invitations to bargain.[10] Here, the offeror’s statements didn’t demonstrate an intent to be bound because it wasn’t reasonable to assume that the advertiser intended to form agreements with every person who got their hands on the envelopes. Similarly, a clothing store that advertises $99 suits in the local newspaper can’t reasonably be intending to form contractual obligations with every person who reads the paper, due to obvious stocking and logistical limitations.

Some advertisements may become offers, however, when it is clear who is being solicited and performance is promised to a targeted offeree. When an advertisement is certain as to the article being sold, has a definite price, and leaves nothing open for negotiation, it may constitute an offer.

For example, in the 1957 case, Lefkowitz v. Great Minneapolis Surplus Store, the defendant department store advertised it in a newspaper:[11]

“One Black Lapin Stole. Beautiful. worth $139.50. $1.00: First Come First Served”

The plaintiff went to the store and told the store manager that he was willing to pay the $1 for the stole, but the store manager refused to sell the merchandise.[12] In reaching its conclusion that the advertisement was a valid offer, the court reasoned that “the test of whether a binding obligation may originate in advertisements addressed to the public is ‘whether the facts show that some performance was promised in positive terms in return for something requested.’”[13]

            The ad in this case was considered an offer because it was definite, clear and targeted – it was targeted to the first person who agreed to purchase the item because of the phrase “first come, first served.”

The third element, certainty, requires that all offers must be specific and definite in terms of to whom they’re communicated and what they contain. Proposals that don’t address key terms are considered “invitation for offers.” An offer must be sufficiently certain and specific because courts want to know what the parties were agreeing to do, or not do.[14] For example, an “offer” to buy a product that does not specify the price one is willing to pay would likely not be considered an offer. Because price is such a key term, leaving it out may indicate an unwillingness to finalize an agreement. Note that there may be exceptions in cases in which a “market price” can be inferred. So, telling your stock broker to purchase 100 shares of Apple could be construed as willingness to be bound by contract because the market price may be assumed.

The upshot of these elements is that offers must be specific and must reasonably communicate an intent to be bound. Price quotes are not generally considered offers because they do not communicate an intent to be bound, though a notable exception was made where the quote was very specific and stated, “for immediate acceptance.”[15]

For similar reasons, list prices in online or physical stores are not offers. When you see a product listed in an online store such as Amazon.com for $59.99 and you place an order for the product, you are making an offer, not an acceptance. If the merchant declines your order because the product is out of stock or for pretty much any other reason, the merchant has not breached a contract. It is only when you place the order and receive a confirmation email that there is an offer and an acceptance, and thus a binding contract.

It should be noted that there are false advertising laws that may apply to ads or listed prices in some cases. But contractually, an ad or listed price does not constitute an offer, except in rare cases.

Other examples of statements that are not considered offers because they are not definite enough include:

“I would consider selling my car to you for $10,000.”

“I would not sell my house for less than $250,000.”

“I want to keep my car, but if you’d offer me $12,000, I’d be interested.”

All these statements indicate interest but are not definitive enough to manifest an intent to be bound, and so are not offers.

Extending an offer is the first step in creating a contract and is a pillar in contract law. To determine whether something is an offer or merely an invitation to deal, courts must look at whether the communication clearly manifested an intent to be bound by contract.