Contract Formation

• Author: J.H. Verkerke
• Pages: 133-282

III. Contract Formation

We turn our attention now to a closer study of the process by which

parties form a contract. In the sections that follow, we will learn how

to identify an offer and what constitutes an acceptance. We will

examine the special rules for offers of a unilateral contract and for

firm offers. Finally, we will tackle the intricacies of U.C.C. § 2-207

and debate the legal policies applicable to modern consumer

contracting.

All of these rules derive from the fundamental principle that

contractual obligations are based on consent. For centuries, courts

applied a subjective test to determine whether each of the parties

truly intended to form a binding contract. They spoke of “a meeting

of the minds” between the parties. As we have already seen in

discussing Lucy v. Zehmer, however, more modern decisions focus

instead on the parties’ outward manifestations to determine their

contractual intent. Older cases used various legal fictions and other

devices to protect promisees who reasonably believed that a promisor

had made a binding commitment. Thus, the Restatement (Second) of

Contracts (1981) § 17 requires only “a manifestation of mutual

assent” to an exchange. This so-called “objective theory” of contract

finds expression in the Restatement (Second) and in the cases that

follow.

1. Offer

Parties ordinarily manifest their mutual assent to a contract by means

of an offer and acceptance. The Restatement (Second) describes

mutual assent in the following terms:

§ 22 Mode of Assent: Offer and Acceptance

(1) The manifestation of mutual assent to an

exchange ordinarily takes the form of an offer

or proposal by one party followed by an

acceptance by the other party or parties.

(2) A manifestation of mutual assent may be

made even though neither offer nor

acceptance can be identified and even though

134

134

the moment of formation cannot be

determined.

Comment:

a. The usual practice. Subsection (1) states the

usual practice in the making of bargains. One

party ordinarily first announces what he will

do and what he requires in exchange, and the

other then agrees. Where there are more than

two parties, the second party to agree may be

regarded as accepting the offer made by the

first party and as making a similar offer to

subsequent parties, and so on. It is

theoretically possible for a third person to

state a suggested contract to the parties and

for them to say simultaneously that they

assent. Or two parties may sign separate

duplicates of the same agreement, each

manifesting assent whether the other signs

before or after him. Compare Illustration 5 to

§ 23.

b. Assent by course of conduct. Problems of offer

and acceptance are important primarily in

cases where advance commitment serves to

shift a risk from one party to the other, as in

sales of goods which are subject to rapid price

fluctuations, in sales of land, and in insurance

contracts. Controversies as to whether and

when the commitment is made are less likely

to be important even in such cases once

performance is well under way. Offer and

acceptance become still less important after

there have been repeated occasions for

performance by one party where the other

knows the nature of the performance and has

an opportunity for objection to it. See

Uniform Commercial Code § 2-208(1);

compare Comment a to § 19. In such cases it

is unnecessary to determine the moment of

making of the contract, or which party made

135

135

the offer and which the acceptance. Thus,

Uniform Commercial Code §§ 2-204 and 2-

207(3), relating to contracts for the sale of

goods, provide that conduct by both parties

which recognizes the existence of a contract is

sufficient to establish it although the writings

of the parties do not otherwise establish a

contract. The principle has also been applied

in non-sales contexts.

The Uniform Commercial Code adopts an even more liberal

approach to demonstrating mutual assent.

§ 2-204. Formation in General.

(1) A contract for sale of goods may be made

in any manner sufficient to show agreement,

including conduct by both parties which

recognizes the existence of such a contract.

(2) An agreement sufficient to constitute a

contract for sale may be found even though

the moment of its making is undetermined.

(3) Even though one or more terms are left

open a contract for sale does not fail for

indefiniteness if the parties have intended to

make a contract and there is a reasonably

certain basis for giving an appropriate remedy.

Although more complicated situations sometimes arise, it is often

helpful to begin to analyze parties’ negotiations by trying to identify

an offer made and an acceptance given. One prominent

commentator explained the essential elements of contract formation

as follows:

An offer is an act on the part of one person

whereby he gives to another the legal power

of creating the obligation called contract. An

acceptance is the exercise of the power

conferred by the performance of some act or

acts. Both offer and acceptance must be acts

expressing assent.