§ 2.2 Preliminary Communications Compared to Offers-Interpretation

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The determination of whether a certain communication by one party to another is an operative offer,n1 and not merely an inoperative step in the preliminary negotiation, is a matter of interpretation in the light of all the surrounding circumstances.n2 Since two cases are never identical in the exact words used, in the existing relations and history of the parties, in the circumstances surrounding the communication, the decision made in one case can never be regarded as a conclusive precedent for the other. Nevertheless it may be a suggestive and enlightening precedent.n3 Even in making this limited use of it, however, it must be remembered that the printed report of the case practically never gives us its entire setting, and that, in the delicate process of interpretation, the decisive factor may have been something that is not in print. It is the sum-total of factors that leads to a decision; and without knowing all of these factors it is not possible to know with assurance just what the court was interpreting and just why it arrived at its conclusion.

The interpretation of words and actions is, in part, an effort to ascertain the meaning given to those words and actions by the speaker and actor. To an equal extent it is an effort to ascertain the meaning given to those words and actions by another person to whom they are communicated. Before determining what legal operation shall be given to the words and actions, it is necessary also to determine whether either party actually knew or had reason to know the meaning given by the other party.n4 Sometimes this last determination can not be made without knowing the meaning that would be given to the words and actions by other persons. At other times it is determined with good assurance by the express admissions of one party or by the communications made to him by the other.n5

This process of interpretation with respect to communications made in the course of preliminary negotiations is the same as that with respect to the words of a complete and fully integrated contract. In the latter case, however, a longer series of facts and events will usually be involved. The court will be concerned with the legal operation of these facts and events, with the result that pure interpretation to determine ''meanings'' is continually mingled with the process of legal ''construction'' to determine legal effects. Although the process of interpretation of a communication for the purpose of determining whether or not it is an operative offer is the same as that of an already accepted offer constituting a contract, there is a difference. Just as there are canons of construction for the construction of contracts, there is a specific one for the construction of purported offers. Once the parties have gone beyond the threshold, and it is clear that the parties have intended to contract, and the issue involves the appropriate resolution of a post-agreement dispute, the court must endeavor to use all the tools of interpretation and construction to come to a just resolution and must attempt to avoid a finding that no contract exists. If the issue is whether or not a contract has been made by acceptance of a purported offer, the court can wisely adhere to a canon of construction to the effect that if there is substantial doubt, a communication is not an offer.n6 The courts are quite properly reluctant to construe a communication as an offer unless it is quite clear that a commitment has been made.

Although there is no magic formula to determine whether a particular communication is an offer, the following factors may be looked at to help in the determination. First, the ordinary meaning of language is influential, but never determinative. For example, the word ''quote'' may be understood as making a commitment,n7 while the word ''offer'' may, in context be deemed a mere price quotation.n8 Second, the communication must be looked at in connection with prior communications between the parties. An initial communication will less likely be deemed an offer than a response to a request for an offer.n9 Third, the selectivity of the communication, or lack thereof, is influential in making the determination. Thus, a newspaper advertisement, circular or form letter is only rarely an offer.n10 Fourth, the prior practices of the parties, their ''course of dealings,'' can be very illuminating on the construction of a particular communication.n11 Fifth, local usage or usage of the trade can be similarly illuminating.n12 Sixth, the social relationship of the parties provides a context which helps determine the reasonable understanding of the addressee of words. For, example, there is a presumption of gratuity when services are rendered within the family. Seventh, the relative completeness of terms helps determine if a reasonable person would understand a given communication to be an offer. The more complete the proposal, the more likely it reasonably can be taken to be an offer.n13 Eighth, the nature of the subject matter helps to make the determination of whether an offer has been made. Proposals to sell real property are less likely to be reasonably understood as offers than proposals for the sale of goods in the normal course of business.n14 This is so for at least two reasons. Inventory can be added to, but real property is always unique. In addition, it is popularly known that real property transactions usually take on a formal pattern leading to a detailed written contract followed by a closing (or settlement) of the transaction, while sales of goods are frequently made informally, by telephone or over a cup of coffee. Ninth, a proposal is likely to be deemed to be an offer if it is foreseeable that the addressee of the proposal will rely upon it. For example, an unsolicited proposal by a subcontractor to a general contractor who is about to bid on a large public project may be treated as an offer despite the fact that it is unsolicited and contains no language of commitment.n15 This is because the subcontractor can reasonably foresee that the proposal will be used by the general contractor in computing its bid. Perhaps a special case engaging this ninth factor is where the communication requests that the addressee take action, as in an offer of a rewardn16 or a corporate tender offer in a takeover attempt.n17 Other proposals that request definite action by the offeree are also likely to be construed as offers to unilateral contract.n18 These nine factors are but tentative working criteria. It is likely that others can be identified. Cases in this and subsequent sectionsn19 demonstrate the extent to which these factors accurately describe the law-in-action.

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

Contracts LawFormationOffersGeneral Overview

FOOTNOTES:

(n1)Footnote 1. Offer is defined in § 1.11 above.

(n2)Footnote 2. In Metts v. Central Standard Life Ins. Co., 142 Cal.App.2d 445, 298 P.2d 621 (1956) , the defendant sent an application form for polio insurance to the plaintiff, containing on the reverse side the words: ''Immediate First Day Coverage Automatically Covers Entire Family.'' Filling out and mailing the application consummated a contract.

In Webster v. Bowles, 213 F.2d 417 (1st Cir.1954) , the defendant sent the following telegram, after much previous discussion: ''If for any reason you do not wish to carry out agreement for purchase of your Alliance stock by Atlas will be glad to sell you our stock including small stockholders total 70,000 shares at price of 13____________________'' The Court carefully considers the communications of the parties and holds that this was merely an invitation for further negotiation and not an operative offer.

In Findleton v. Taylor, 208 Cal.App.2d 651, 25 Cal.Rptr. 439 (1962) , plaintiff said he would trade his shares for certain patents. Defendant replied: ''It is a deal.'' Plaintiff said that he would cancel defendant's license under one patent. Defendant replied: ''It is no deal.'' See also Norton & Lamphere Constr. Co. v. Blow & Cote, Inc., 123 Vt. 130, 183 A.2d 230 (1962) . Noted § 2.9 and 4.10.

In Smith v. Farrell, 199 Va. 121, 98 S.E.2d 3 (1957) , the court reviewed the facts and held that they showed only preliminary negotiation, not a contract.

In Jenkins Towel Service, Inc. v. Fidelity-Philadelphia Trust Co., 400 Pa. 98, 161 A.2d 334 (1960) , the defendant was a trustee of real property, the sale of which was necessary. After some fruitless negotiations, the defendant wrote a letter to plaintiff requesting a ''sealed bid,'' stating that when the bids were opened ''an Agreement of Sale [will be] tendered to the highest acceptable bidder provided the offer is in excess of $92,000 cash,'' and further stating several terms of the ''Agreement'' that would be tendered. The letter contained this sentence: ''The trustees of course reserve the right to approve or disapprove of any and all offers, or to withdraw the properties from the market.'' The plaintiff submitted the only bid that complied with all the requirements made in the defendant's letter. The plaintiff demanded the ''Agreement'' and, on refusal by defendant, sued for specific performance. The court reversed the trial court's decision and decreed specific performance. It held that the defendant's letter was an offer to sell and not a mere invitation to submit offers. One judge dissented, giving plausible reasons. The court regarded the defendant's letter as ''ambiguous,'' and resolved the doubt as to interpretation against the defendant. The words of the defendant's letter were such as to give ground for a reasonable difference of opinion and should not have been deemed an offer. In Eastern Electric Sales Co. v. Provident Tradesmens Bank & Trust Co., 400 Pa. 429, 162 A.2d 215 (1960) , it was the letter of the bidder that was in doubtful terms and (citing Jenkins Towel) was construed to be a conditional acceptance. As reported, the defendant had not made an operative offer.

In GMAC v. Turner Ins. Agency, Inc., 96 Idaho 691, 535 P.2d 664 (1975) , the court found a contract arising out of a routine exchange of business correspondence concerning advance payment of insurance premiums. The writings were clear and the surrounding circumstances corroborated the commitment of both parties.

This section is cited in Citizens' Committee of N.E. v. Hampron, 19 Conn.Sup. 375, 114 A.2d 388 (Com.Pl.1955) , interpreting certain written communications as being more than mere preliminary negotiation and awarding nominal damages of $25 per breach.

(n3)Footnote 3. Letters expressing readiness to be surety or to put resources behind an undertaking held not to be offers in Stone v. Commonwealth Finance Corp., 215 App.Div. 704, 212 N.Y.S. 924 (1926) , aff'd, 243 N.Y. 528, 154 N.E. 592 (1927) ; McIver v. Richardson, 1 M. & S. 557 (1813).

In Elks v. North State Life Ins. Co., 159 N.C. 619, 75 S.E. 808 (1912) , the letters expressed a readiness to make a loan, but no offer was made.

Chiapparelli v. Baker, Kellogg & Co., 252 N.Y. 192, 169 N.E. 274 (1929) , is a good example of indefinite preliminary conversations in regard to the procurement of a foreign loan, a verdict awarding a commission being set aside.

''A mere statement of a person's willingness to enter into negotiations with another person is in no sense an offer and cannot be accepted so as to form a binding contract.'' Salisbury v. Credit Service, Inc., 39 Del. 377, 199 A. 674 (1937) . But the hard question is one of interpretation. Was the ''statement of willingness'' such that the party making it had reason to know that it would be and was understood by the other party as empowering the closing of the negotiations by an expression of assent and not merely as inviting the continuation of the negotiating process?

In Apablasa v. Merritt & Co., 176 Cal.App.2d 719, 1 Cal.Rptr. 500 (1959) the court held that a series of letters concerning the possible purchase and marketing of an invention constituted no more than ''preliminary discussions of various plans.'' The defendant's first letter stated some possible terms. The plaintiff's reply rejected some of those terms. The defendant's next letter suggested a possible joint venture. The plaintiff then wrote saying that he accepted the defendant's first proposal, ''with this proviso'' [stating a new term]. The first letter was not sufficiently definite or complete to be an operative offer. If it had been such an ''offer'' it was rejected and was not renewed by the next letter or any later ones. The fourth letter attempting to accept was ineffective because the power of acceptance (even if it had once existed) had lapsed and because the attempted ''acceptance'' was conditional.

(n4)Footnote 4. Restatement (Second) of Contracts § 26 comment a, states: ''If the addressee of a proposal has reason to know that no offer is intended, there is no offer even though he understands it to be an offer. ''Reason to know'depends not only on the words or other conduct, but also on the circumstances, including the previous communications of the parties and the usages of their community or line of business.'' The same general idea was conveyed in the first Restatement § 25.

(n5)Footnote 5. This is considered more at length in Chapter 24 on Interpretation.

Hutton v. Watling, [1948] 1 All Eng. 803 (C.A.), is another excellent illustration, in spite of a confused opinion involving the admissibility of parol evidence. The defendant delivered a document, drawn, signed, and stamped by himself, stating the terms of a purchase and sale of a business, with an option to buy certain land. The plaintiff received the document and made payments under it. He understood it to be a fully integrated offer; and the defendant had reason to know that he so understood it. A contract was held to be consummated, in spite of the defendant's effort to show that he intended the document to be only a preliminary memorandum.

(n6)Footnote 6.

U.S. - United States v. Braunstein, 75 F.Supp. 137, 139 (S.D.N.Y.1947) . (''Greater precision of expression may be required, and less help from the court given, when the parties are merely at the threshold of a contract.'')

Minn. - Henry Simons Lumber Co. v. Simons, 232 Minn. 187, 44 N.W.2d 726 (1950) .

(n7)Footnote 7.

Conn. - Jaybe Constr. Co. v. Beco, Inc., 3 Conn.Cir. 406, 216 A.2d 208 (1965) .

Ky. - Fairmount Glass Works v. Grunden-Martin Woodenware Co., 106 Ky. 659, 51 S.W. 196 (1899) .

(n8)Footnote 8. Moulton v. Kershaw, 59 Wis. 316, 18 N.W. 172 (1884) .

(n9)Footnote 9.

Kan. - Cox v. Denton, 104 Kan. 516, 180 P. 261 (1919) .

Neb. - Nebraska Seed Co. v. Harsh, 98 Neb. 89, 152 N.W. 310 (1915) .

(n10)Footnote 10. See § 2.4 and 2.7 below.

(n11)Footnote 11. U.C.C. § 1-205 defines course of dealing as ''a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.'' While the focus is on ''transaction,'' the common basis of understanding can also apply to preliminary negotiations and arguable offers. The same may be said for Restatement (Second) of Contracts § 223.

(n12)Footnote 12. See U.C.C. § 1-205; Restatement (Second) of Contracts § 219-222.

(n13)Footnote 13. Fairmount Glass Works v. Grunden-Martin Woodenware Co., 106 Ky. 659, 51 S.W. 196 (1899) .

(n14)Footnote 14.

Cal. - Lonergan v. Scolnick, 129 Cal.App.2d 179, 276 P.2d 8 (1954) , the owner of land advertised for offers and sent a ''form letter'' describing the land and stating a price in response to an inquiry generated by the advertisement. In response to a further communication the owner gave further details and advised prompt action as other potential buyers were contemplating purchase. The court held that these communications did not justify the other party in understanding them as an operative offer. They created no power of acceptance.

Me. - Owen v. Tunison, 131 Me. 42, 158 A. 926 (1932) .

N.Y. - Blakeslee v. Nelson, 212 App.Div. 219, 207 N.Y.S. 676 (1925) , aff'd mem., 240 N.Y. 697, 148 N.E. 763 .

Pa. -In re Miller's Estate, 43 Wash.C.R. 230 (Pa.Orph.1963). The administrator of an estate wrote to a possible buyer that real property owned by the estate had an asking price of $15,000 and asked if the buyer were interested. Buyer replied accepting the price and enclosing a check for 10% as a down payment. Thereafter, a higher offer was received from a third party and the administrator asked the first buyer if he were interested in increasing his offer. Held there was no contract. The first letter from the administrator was only an offer to negotiate. The administrator eliminated the usual terms of sale and in view of the administrator's fiduciary duty to obtain the highest price the letter was only a request for offers. Compare Jenkins Towel, in note 2 above.

Wash. - Boeing Co. v. King County, 76 Wash.2d 493, 457 P.2d 595 (1969) . This is not quite an offer and acceptance case, but the four dissenting judges thought it was quite similar. The county leased to Boeing a tract of airport land for 75 years. At five year intervals either party could ''request'' a readjustment of rent before thirty days prior to the commencement of each five year period. If they could not agree, the readjustment of rent would be fixed by arbitrators. In a timely manner, the county wrote to Boeing, referencing the letter, ''Readjustment of Rentals'' and asked for information or comments ''relevant to the readjustment of rentals.'' Boeing and the dissenters thought that although this communicated the county's desire for a readjustment, it was not a request for one. The offer and acceptance analogy is strained. A request or a notice is not an offer and need not meet the criteria for an offer.

Eng. -Harvey v. Facey, [1893] App.Cas. 552 (Privy Council).

(n15)Footnote 15.

Conn. - Jaybe Constr. Co. v. Beco, Inc., 3 Conn.Cir. 406, 216 A.2d 208 (1965) . The proposal stated, in part, ''In connection with the above we are pleased to quote a job price of $14,450 covering items 4, 11, 11a, 12, 13, 14, 16, 17 & 23.'' This was an offer.

La. - LeMoine v. Goudeau, 127 So.2d 207 (La.App.1961) is not to the contrary. In a suit by a general contractor for breach of an oral agreement with an electrical subcontractor, in reliance upon which he had entered his bid for a building contract, the trial court found on conflicting evidence that defendant had merely furnished an estimate for plaintiff's convenience and plaintiff knew that defendant had gone out of business. Based on these findings, there was no offer.

Md. - Maryland Supreme Corp. v. Blake Co., 279 Md. 531, 369 A.2d 1017 (1977) .

Similar reasoning is employed to prevent revocation of conceded offers by subcontractors. See Drennan v. Star Paving Co., 51 Cal.2d 409, 333 P.2d 757 (1958) , discussed in § 2.31 and the chapters on promissory estoppel below.

(n16)Footnote 16. See § 1.23 above.

(n17)Footnote 17.

U.S. - Lowenschuss v. Kane, 520 F.2d 255 (2d Cir.1975) , on remand, 72 F.R.D. 498 (S.D.N.Y.) . R. E. Crummer & Co. v. Nuveen, 147 F.2d 3, 157 A.L.R. 739 (7th Cir.1945) is an excellent illustration in which the court interpreted a published notice to bondholders as an operative offer that could be accepted by tendering bonds within a reasonable time. ''For the convenience of bondholders who may wish to surrender their bonds the Board ... has arranged to provide funds for the purchase of the above described bonds at par and interest to December 1, 1941. Holders may send their bonds to the M. Trust Co. for surrender pursuant to such terms.'' This was held to be an offer to buy all bonds tendered and not merely a request to submit offers to sell bonds.

Del. - Gilbert v. El Paso Co., 490 A.2d 1050 (Del.Ch.1984) , judgment aff'd, 575 A.2d 1131 .

Mich. - Levenburg v. Merrill, Lynch, Pierce, Fenner & Beane, 334 Mich. 508, 54 N.W.2d 626 (1952) .

(n18)Footnote 18. Coffman Industries, Inc. v. Gorman-Taber Co., 521 S.W.2d 763 (Mo.App.1975) . A general contractor defaulted and the surety began paying suppliers and subcontractors. There was a dispute between the plaintiff-supplier and a subcontractor. The surety told the subcontractor that when it had settled with the supplier the surety would pay the subcontractor's claim. In reliance, the subcontractor reached a settlement with the supplier. It was held that a unilateral contract was formed when the settlement was reached. Alternatively, the surety was bound by promissory estoppel.

(n19)Footnote 19. See § 2.3-2.7 below. See also § 1.6 and 2.1 above.