Part I formation of contracts topic a offer and acceptance chapter 2 offers; creation and duration of power of acceptance

§ 2.1 Preliminary Negotiation

[Go To Supp]

The history of any contractual transaction is merely the narration of a series of events. It is always of advantage to consider these events in their chronological order, determining their legal operation one by one as they have occurred. In case there is litigation, the problem before the court always is to determine what kind of a judgment or decree to render and what action to command. When a lawyer is consulted in regard to the case, it is the lawyer's function to predict and to advise the client as to what the judicial decree will be in case there is litigation, and what action will be commanded. To determine these matters, it is helpful to consider the whole transaction step by step as it may have occurred, separating those facts that are immaterial from those that are material, and the facts that are merely evidential from those that are legally operative.

A bargaining transaction usually begins with what may be described as preliminary negotiation. This may include mere general discussion of a very indefinite character. There may be requests for estimates or bids.n1 There may be the puffing of wares by advertising their qualities and stating their prices. Advertisements may be placed in newspapers or broadcast by television and radio stations, printed in handbills or in magnificently illustrated catalogs. Much of this preliminary negotiation may be totally inoperative to affect the legal relations of the parties involved. Its purpose may be merely to acquaint another person with a certain fact and to create a demand for a seller's goods, services or real property or a buyer's interest in acquiring certain kinds of goods or services. Inoperative preliminary negotiation may or may not lead to the making of a legally operative offer.

The term ''preliminary negotiation,'' however, may be used to include all those communications and other events in a bargaining transaction that are antecedent to acceptance, that is, antecedent to the completion of the contract. In this sense, every offer is a part of the negotiation that is preliminary to the making of a contract. Indeed, there may be more than one offer. In the preliminary haggling process, there are frequently offers and counteroffers, each one of which has a certain legal operation, but, none of which is transformed into a contract. To determine whether or not a bargaining transaction actually results in the making of a contract, courts must consider all of the preliminary negotiations, all of the offers and counteroffers, interpret the various expressions of the parties, and form a judgment as to whether they ever finally expressed themselves as in agreement on complete and definite terms.

If by ''preliminary negotiation'' we mean preliminary to a contract, we include in the term all operative offers and counteroffers that are antecedent to effective acceptance. The term may also be used to include only those communications that are antecedent to any power of acceptance and are themselves without any legal operation. In the latter usage of the term, we include no operative offer whatever.n2

In the process of negotiation a party may use words that standing alone would normally be understood to be words of ''contract,'' at the same time limiting them in such a way as to show that a subsequent expression of assent on his or her part is required. In such a case the expression is neither an operative offer nor an operative acceptance. It is merely part of preliminary negotiation. Thus, a written proposal stating many terms may be made ''subject to agreement'' on another specified matter; or it may be said: ''I reserve final determination for tomorrow.'' Words such as these will in nearly all cases be held to show that an operative assent has not yet been given.n3

In a much cited case, the plaintiff offered to sell his interest in a patent to the defendant on stated terms. The latter was willing to buy, but only on condition that a trusted third person, one Abernethie who was not present, should approve the deal. The report states: ''It was then proposed that, as the parties were all present and might find it troublesome to meet again, an agreement should then be drawn up and signed, which, if Abernethie approved of the invention, should be the agreement, but if Abernethie did not approve, should not be one.'' Later, the plaintiff brought suit, setting forth this written instrument as a contract. The defendant pleaded that Abernethie did not approve. The court held, quite justly, that oral testimony of the conversation was not excluded by the ''parol evidence rule,'' giving as a reason that, until Abernethie expressed approval, no contract had been made. This reasoning is believed to be erroneous. Abernethie was not one of the contracting parties, and his expression of approval of the invention was not to be the acceptance of the plaintiff's offer. No further expression of assent by either party was contemplated; and Abernethie was not an agent of the defendant empowered to accept an offer. Neither party had power of revocation. This was merely a case in which the plaintiff gave his promise to sell in exchange for the defendant's conditional promise to buy, the condition being an act of a third party. The parties were irrevocably bound in exactly the same way that they would have been bound if the condition had been expressed in the signed writing.n4

Preliminary negotiation, including offers and counteroffers, also may take place after the making of one contract but prior to the making of another. The negotiation may be with reference to a possible rescission of a contract already made or its modification by the substitution of new terms. If such negotiation never arrives at an acceptance of a definite offer, the original contract still stands and may be enforced.n5

Preliminary actions and communications, even though not in themselves legally operative as offers of a bargain, may nevertheless be highly important in determining whether a contract has subsequently been consummated and what its terms are. Such communications may be incorporated into the offer that is finally accepted, and in any case they form part of the background against which the final expressions of agreement must be interpreted and understood. Even if those final expressions are put in the form of a written document, now often described as a written ''integration,'' purporting to be the final and complete expression of all terms agreed on, a just interpretation of that integration cannot be made without considering the actions and communications of the parties in the preliminary bargaining process. It is the intentions and meanings of the parties that are being ''integrated,'' and it is those meanings and intentions that justice requires the court to determine and make effective.

In Vitale v. Russell, n6 the plaintiff contractor negotiated for the purchase of gravel on defendant's farm. Before removal of the gravel, a town permit was required. This the plaintiff agreed to procure. The defendant said: ''Go ahead. Get the ball going.'' The plaintiff applied for the permit and had plans and surveys made at a cost of $135. Both parties attended a hearing before the town board on Dec. 12. On Dec. 21, the board notified the defendant that a further survey was necessary. He sent no word to the plaintiff, and the latter took no further action. Some 4 months later, the defendant told the plaintiff that the deal was off, because he could get more money elsewhere. On these facts, the trial court held that no contract was consummated. The Supreme Court held that this finding of fact could reasonably be supported. Without doubt the opposite finding could also be supported. The parties properly might be held to have made a binding contract for the sale of the gravel, conditional only on the plaintiff's procurement of a permit within a reasonable time. This condition seems not to have been performed, and, if so, the defendant was discharged. The plaintiff's failure was a breach by him. But observe that the consummation of a valid contract was not prevented by the fact that the parties agreed that their obligation was conditional on the granting of a town permit.

Among the kinds of communications that border on offers commonly made in negotiations that may or may not result in a contract are statements of intention, hopes and desires,n7 estimates,n8 invitations to make offers,n9 advertisements,n10 catalogs and circular letters,n11 price quotationsn12 and preliminary agreements.n13

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawContract InterpretationGeneral OverviewContracts LawSales of GoodsGeneral OverviewContracts LawSales of GoodsForm, Formation & ReadjustmentFormationOffer & AcceptanceContracts LawFormationDefinite TermsContracts LawFormationGeneral OverviewContracts LawContract Conditions & ProvisionsGeneral Overview

FOOTNOTES:

(n1)Footnote 1. This section (as well as § 2.8, 2.9 and 4.3) is cited in Tradeways Inc. v. Chrysler Corp., 342 F.2d 350 (2d Cir.1965) , cert. denied, 382 U.S. 832 , noted in § 4.3.

In Bank of Benton v. Cogdill, 118 Ill.App.3d 280, 73 Ill.Dec. 871, 454 N.E.2d 1120 (1983) . A bank wrote to a mortgagee in default as follows: ''If we do not have some assurance of payment of the loan, it may be necessary for us to start foreclosure action or have you deed the property to the Bank of Benton in satisfaction of the debt.'' This was not an offer that could be accepted by tender of a deed to the property.

A letter to jobbers, stating the terms on which Iver Johnson revolvers would be sold, was held not to be an offer, but an invitation to submit offers on certain terms. Montgomery Ward & Co. v. Johnson, 209 Mass. 89, 95 N.E. 290 (1911) .

In Empire Mining Co. v. International Metals Corp., 314 S.W.2d 676 (Tex.Civ.App.1958) , the defendant wrote what standing alone would clearly have been an offer of certain financing on stated terms; but it was prefaced by a statement thus: ''we are awaiting a report of Mr. Earl regarding Empire. If we are given a favorable opinion, we would be very much interested in further investment. In that regard, I would like to have your reaction to the following proposal.'' This was mere preliminary negotiation and created no power of acceptance of the ''proposal.''

In Arbitration: Writers Guild of America East, Inc. v. Prockter Productions, Inc., 1 N.Y.2d 305, 152 N.Y.S.2d 466, 135 N.E.2d 204 (1956) the parties signed a writing stating in detail two questions for submission to arbitration and excluding the question of damages. There were no express words of agreement to arbitrate those questions. The court held, 4 judges to 3, that the instrument was not a written contract as required by the Arbitration Act but was a mere ''formulation of the questions proposed to be submitted to arbitration.'' The three dissenters and the lower courts held that the writing expressed (by implication) an agreement to arbitrate the stated questions. The writing, as held by the majority, was a mere step in the preliminary negotiation.

In Calcasieu Paper Co. v. Cameron Machine Co., 220 F.2d 876 (5th Cir.1955) the court held that statements as to the price of a machine, made by the seller in telephone conversations, were merely tentative and preliminary negotiations. The actual offer was made later in a letter stating a definite price, an offer that the buyer in fact accepted.

In McGinnis v. Enslow, 140 W.Va. 99, 82 S.E.2d 437 (1954) , an aged woman applied for admission to a Memorial Home on a blank form that did not state all the terms of admission. Her application was accepted by the Home. It was held that no contract was consummated because essential terms were not agreed upon. The communications were only preliminary negotiations.

For cases of preliminary negotiations for the compromise and settlement of a disputed claim, not understood by either party as a final and complete agreement and never reduced to a mutually accepted writing, see Putman v. Cameron 129 Cal.App.2d 89, 276 P.2d 102 (1954) ; Winston v. Mediafare Entertainment Corp., 777 F.2d 78 (2d Cir.1985) .

(n2)Footnote 2. Offer and Acceptance as machinery of making a contract, see Larson v. Inland Seed Co., 143 Wash. 557, 255 P. 919, 62 A.L.R. 444 (1927) .

(n3)Footnote 3. Illustrative cases:

U.S. - Pure Oil Co. v. Petrolite Corp., 158 F.2d 503 (5th Cir.1946) , ''subject to the terms of a sales and purchase agreement to be entered into between the parties.''

Ill. -In Milani v. Proesel, 15 Ill.2d 423, 155 N.E.2d 38 (1958) , the evidence, fully reviewed, showed only preliminary negotiation, with neither a definite offer nor an acceptance. Specific performance was denied. Restitution of a down payment was ordered.

This section is quoted in Borg-Warner Corp. v. Anchor Coupling Co., 16 Ill.2d 234, 156 N.E.2d 513, 156 N.E.2d 930 , dissenting opinion, id. at 930, 935 (1958), the dissenting judge believing that, although the parties had expressed definite agreement on the principal terms of a contract, they had also expressly reserved other matters to be agreed upon before final acceptance. See another note on this case under § 2.8.

Iowa - Carmichael v. Stone, 243 Iowa 904, 54 N.W.2d 454 (1952) , the plaintiff alleged a contract for the purchase of three carloads of wool; but the written and oral communications showed that no agreement was ever reached.

Md. - Peoples Drug Stores v. Fenton Realty Corp., 191 Md. 489, 62 A.2d 273 (1948) , plans and specifications to be approved by one party, lease to be subject to approval by the other.

Mich. - Powell v. Beck, 366 Mich. 627, 115 N.W.2d 317 (1962) .

Mo. - P.R.T. Inv. Corp. v. Ranft, 363 Mo. 522, 252 S.W.2d 315 (1952) . In a written agreement for the sale of improvements on a lot, signed by both parties, providing also for a lease with option to buy, there was the following sentence: ''Subject to purchaser accepting seller's lease on ground.'' The terms of the lease were not specified. An assent to its terms by both parties was still necessary.

N.Y. - Joseph Martin, Jr. Deli., Inc. v. Schumacher, 52 N.Y.2d 105, 436 N.Y.S.2d 247, 417 N.E.2d 541 (1981) ; Ansorge v. Kane, 244 N.Y. 395, 155 N.E. 683 (1927) , reargument denied, 245 N.Y. 530, 157 N.E. 845 ; Brown v. New York Cent. R. Co., 44 N.Y. 79 (1870) .

N.C. - Yeager v. Dobbins, 252 N.C. 824, 114 S.E.2d 820 (1960) , letter from a man to his son-in-law expressing hopes and intentions with respect to a farm was held to create no power of acceptance, although the son-in-law moved with his family from another state and ran the farm for some years. See § 1.15.

Wash. -In Coleman v. St. Paul & Tacoma Lumber Co., 110 Wash. 259, 188 P. 532 (1920) , the court held that a letter written by the defendant indicated ''that it was the purpose of the writer to open negotiations which might possibly lead to a contract, or to settle the terms of a proposed agreement already under consideration, into which he proposes to enter after all the particulars are adjusted,'' and that it created no power of acceptance. Though expressing a willingness to sell at a named price, it also stated that ''the final arrangements and final agreement can be arranged for and the deal concluded'' at a later time.

In Owens-Corning Fiberglas Corp. v. Fox Smith Sheet Metal Co., 56 Wash.2d 167, 351 P.2d 516 (1960) , noted herein under § 3.28, where an ''Interim Purchase Order'' sent in response to an offer expressly stated that ''A firm Purchase Order'' would be sent later. The ''Interim Order'' was mere preliminary negotiation.

In Jacobs v. Schneider, 152 Cal.App.2d 452, 313 P.2d 142 (1957) , an owner promised to pay a commission for finding ''a satisfactory lessee of a building'' which the owner proposed to build. The broker produced H. and M.; and the owner signed with them an ''agreement'' in which he promised to erect a Medical Building, ''plans to be subject to the approval'' of H. and M. The latter promised to lease the building on stated terms. Plans for the building were never agreed on; and H. and M. withdrew. The broker was held not entitled to the commission. The signed instrument was not a contract; and the broker had not produced ''a satisfactory lessee.'' See also Pastor v. Williams, 135 A.2d 460 (D.C.Mun.App.1957) , noted herein under § 2.30.

(n4)Footnote 4. The case is Pym v. Campbell, 6 El. & Bl. 370 (1856). This decision has been followed in numerous cases, the same erroneous reason often being given. The reasons why the so-called ''parol evidence rule'' should not exclude proof of the orally expressed condition are stated at length in Chapter 26, The ''Parol Evidence Rule,'' especially § 589.

See also § 761 and cases there noted.

To be contrasted is the case of Foster & Kleiser v. Baltimore County, 57 Md.App. 531, 470 A.2d 1322 (1984) . CMAC owned property which Baltimore County officials wanted to purchase. Both parties signed a purchase agreement prepared by the County, requiring approval by the Baltimore City Council, and stating that the agreement would be null and void if approval was not obtained. Two months and eight days later the Council voted its approval. In a statutory action by a third party, it was important to determine the day on which the contract was made. It was properly held that there was no contract until Board approval. The Board is not a disinterested third party. The proposal made the Board the final executive authority of one of the contracting parties.

Also to be contrasted are commercial cases where a price quotation is detailed enough to be an offer, but nonetheless fails to be an offer because it provides that the seller's home office or executive officer must give final approval. McCarty v. Verson Allsteel Press Co., 89 Ill.App.3d 498, 44 Ill.Dec. 570, 411 N.E.2d 936 (1980) ; Engineering Associates, Inc. v. Irving Place Associates, Inc., 622 P.2d 784 (Utah 1980) .

(n5)Footnote 5.

Cal. -See De Witte v. Calhoun, 221 Cal.App.2d 473, 34 Cal.Rptr. 491 (1963) , where angry recriminations led to termination of an employment contract as to the future but not as to past performance. Noted under § 2.13.

Eng. -Robinson v. Page, 3 Russ. 114 (1826).

(n6)Footnote 6. 332 Mass. 523, 126 N.E.2d 122 (1955) .

(n7)Footnote 7. See § 1.15 above.

(n8)Footnote 8. See § 2.5 below.

(n9)Footnote 9. See § 2.3 below.

(n10)Footnote 10. See § 2.4 below.

(n11)Footnote 11. See § 2.7 below.

(n12)Footnote 12. See § 2.5 below.

(n13)Footnote 13. See § 2.8 and 2.9 below.