Contract Formation

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Collaborative Teaching Materials for Contracts - J.H. Verkerke»

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. § 2207 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 the moment of formation cannot be determined.


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 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.

The act constituting an offer and the act of constituting an acceptance may each consist of a promise. A promise is an expression of intention that the promisor will conduct himself in a specified way in the future, with an invitation to the promisee to rely thereon. If only one of the acts has this character, the contract is unilateral. If both acts have this character, the contract is bilateral.

Arthur Corbin, Offer and Acceptance, and Some of the Resulting Legal Relations, 26 Yale L.J. 169, 171 (1917).

The Restatement (Second) includes several provisions defining the nature of an offer.

§ 24. Offer Defined

An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.

§ 26. Preliminary Negotiations

A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

1.0.1 Hypo on Offer Rules

A listing on advertised the following vehicle for sale:

2004 GMC Suburban 4WD. Rare 9-seat model. Under warranty! Original MSRP $43,000, current blue book $13-14,000, will sacrifice for $10K. Call Kim at (913) 240-6349 or (434) 985-2101.

Suppose that on the morning that this listing first appears, George buys the gas-guzzling monster from Kim. Later the same day, Travis calls Kim. When Kim answers the phone “Hello,” Travis says, “I accept your offer to sell the Suburban for $10,000.”

Apply the legal rules defining offer to this interaction. Did Kim make an offer to contract when she listed her truck on How do you suppose that people would respond if courts held that advertisements of this sort are binding offers?

1.1 Principal Case – Dyno Construction Co. v. McWane, Inc.

This case gives you a more complicated factual situation in which to test your understanding of the rules governing offers. As you read, try to identify precisely what language in the purported offer and what surrounding circumstances most affected the court’s decision.

Dyno Construction Company v. McWane, Inc.

United States Court of Appeals, Sixth Circuit

198 F.3d 567 (1999)

Quist, District Judge.

[1]    Plaintiff, Dyno Construction Company, sued Defendant, McWane, Inc., alleging various breach of contract claims arising out of Dyno’s purchase of ductile iron pipe from McWane that was later found to be defective. The district court denied the parties’ cross-motions for summary judgment, and a jury returned a general verdict in favor of McWane. The district court denied Dyno’s motion for a new trial. Dyno appeals the order denying its motion for summary judgment, the judgment entered after trial, and the order denying Dyno’s motion for a new trial. We find no error and affirm.


[2]    Dyno is a company engaged in the business of constructing underground utility projects, specifically underground water and sewer lines. Dyno was purchased in the fall of 1995 by Frederick Harrah, Laymond Lewis, and a third party. Prior to purchasing Dyno, Harrah and Lewis were employees of Reynolds, Inc., a large underground pipeline construction company also in the business of installing underground water and sewer lines.

[3]    McWane is a manufacturer and seller of ductile iron pipe and fittings for underground utility projects. Harrah and Lewis frequently purchased pipe from McWane during their employment with Reynolds, as McWane was the exclusive supplier of certain types of ductile iron products to Reynolds.

[4]    Sometime shortly before November 6, 1995, Dyno submitted a bid to the City of Perrysburg, Ohio, for a multimillion dollar water and sewer system project. In order to prepare the bid, Lewis contacted various suppliers, including McWane, to obtain quotes for necessary materials. On November 6, 1995, Dyno learned that it was the low bidder on the project and would be awarded the contract.

[5]    On November 8, 1995, McWane’s district sales manager, Kevin Ratcliffe, faxed Dyno a document containing quantities and prices for the materials Dyno requested for the Perrysburg Project. Ratcliffe sent a second fax to Lewis on November 13, 1995, which included handwritten prices and notes next to each item. On the fax cover sheet, Ratcliffe asked Lewis to “[p]lease call.”

[6]    On or prior to November 22, 1995, Lewis phoned Ratcliffe and told him to order the materials. Lewis testified at his deposition that he thought that there was a “done deal” when he got off the phone with Ratcliffe. However, after the phone call, Ratcliffe prepared and sent a package to Lewis via Federal Express. The Federal Express package included a purchase order, a credit application, and a cover letter in which Ratcliffe asked Lewis to review and sign the purchase order and credit application and return the originals to Ratcliffe. The purchase order and credit application each stated that the sale of the materials was subject to the terms and conditions printed on the reverse sides of those documents. The reverse side of each document contained additional terms and conditions, including a provision which limited McWane’s liability for defective materials. The Federal Express invoice kept in McWane’s files showed that Dyno received the package on November 24, 1995, at 8:53 a.m.

[7]    Lewis called Ratcliffe on December 1, 1995, to inquire about the status of Dyno’s order. Lewis testified that Ratcliffe told him that “you have to sign our forms.” Lewis indicated both in his deposition and at trial that he was not surprised when Ratcliffe told him that the purchase order and credit application would have to be signed before McWane would ship the materials. Lewis told Ratcliffe that he had not received the forms Ratcliffe sent via Federal Express and could not find the package in his office. At Lewis’ request, in order to expedite the transaction, Ratcliffe faxed Lewis copies of the documents that were sent on November 22, 1995. However, Ratcliffe did not fax the back sides of the documents which included, among other things, this provision limiting McWane’s liability:


[8]    Dyno signed the faxed pages without the quoted damages limitation provision and returned them to Ratcliffe later that day.

[9]    Dyno had substantial problems with the pipes it purchased from McWane. Although McWane repaired and reinstalled the pipe to the satisfaction of Dyno, it refused to pay Dyno for consequential damages suffered as a result of the defects in the pipes on the basis of the limitation of damages provision on the back of the purchase order. Dyno filed this suit in an attempt to recover its consequential damages.

[10]    Both parties moved for summary judgment with respect to the question of whether the quoted provision limiting McWane’s liability for consequential damages was a part of the Dyno/McWane contract. In denying the motions, the district court rejected Dyno’s contention that the two written quotations which Ratcliffe sent to Lewis were offers that Dyno accepted when Lewis informed Ratcliffe that Dyno wished to purchase the pipe from McWane because the quotations were part of preliminary negotiations between the parties. Instead, the court concluded that the contract was formed or, alternatively, modified, when Lewis signed the documents he received from Ratcliffe by fax on December 1, 1995. The district court also rejected as a matter of law McWane’s arguments that Dyno’s acceptance of documents containing the warranty limitation provision established a course of performance and that a course of dealing was established by Lewis’ dealings with McWane while Lewis was employed at Reynolds. Instead, the district court found that McWane’s argument that Lewis had knowledge of the disputed provision based upon his receipt of the Federal Express package presented a genuine issue of material fact. Thus, the district court framed the issue for the jury with respect to the limitation of damages provision as whether Lewis knew or should have known about McWane’s terms and conditions at the time he signed the fax copy.

[11]    At trial, during the conference on jury instructions, the district court rejected Dyno’s proposed instruction number 7, which would have allowed the jury to find that the contract had been formed on or before November 22, 1995, on the basis of its ruling with respect to the summary judgment motions that the contract was formed on December 1, 1995. At the conclusion of trial, the jury returned a verdict in favor of McWane.


A. Summary Judgment

[12]    Dyno first contends that the district court erred when it found that the contract was formed on December 1, 1995, rather than on November 22, 1995. Although Dyno does not argue that the denial of its motion for summary judgment was erroneous, Dyno asserts that the determination made by the district court in ruling on the motion that the contract was made on December 1, 1995, when Lewis signed the fax documents, was erroneous.

[13]    Dyno asserted in its motion for summary judgment, and continues to argue to this Court, that the contract was actually entered into on November 22, 1995, when Lewis told Ratcliffe to go ahead and order the materials that Ratcliffe had listed in his November 8 and November 13 faxes. Dyno claims that the parties agreed to the essential terms of price, quantity, and description, and any other terms to the contract could be supplied by the “gap-filler” provisions of the Uniform Commercial Code, which do not limit the seller’s liability for consequential damages.

[14]    In order to prove the existence of a contract, a plaintiff is required to demonstrate the essential requirements of an offer, acceptance, and consideration. See Helle v. Landmark, Inc., 15 Ohio App.3d 1, 8, 472 N.E.2d 765, 773 (1984). A valid and binding contract comes into existence when an offer is accepted. See Realty Dev., Inc. v. Kosydar, 322 N.E.2d 328, 332 (Ohio Ct.App.1974) (per curiam). Dyno contends that the written price quotations Ratcliffe faxed to Lewis on November 8, 1995, and November 13, 1995, constituted the offer, which Lewis accepted on behalf of Dyno on or about November 22, 1995, when Lewis told Ratcliffe to order the materials listed on the price quote.

[15]    “Typically, a price quotation is considered an invitation for an offer, rather than an offer to form a binding contract.” White Consol. Indus., Inc. v. McGill Mfg. Co., 165 F.3d 1185, 1190 (8th Cir.1999) (citing Litton Microwave Cooking Prods. v. Leviton Mfg. Co., 15 F.3d 790, 794 (8th Cir.1994)); see also Realty Dev., Inc., 322 N.E.2d at 332 (finding that the price quotation furnished to the appellant was “susceptible to the interpretation that [it] was nothing more than an invitation to appellant to make an offer”). Instead, a buyer’s purchase agreement submitted in response to a price quotation is usually deemed the offer. See Master Palletizer Sys., Inc. v. T.S. Ragsdale Co., 725 F.Supp. 1525, 1531 (D.Colo.1989). However, a price quotation may suffice for an offer if it is sufficiently detailed and it “reasonably appear[s] from the price quotation that assent to that quotation is all that is needed to ripen the offer into a contract.” Quaker State Mushroom Co. v. Dominick’s Finer Foods, Inc., of Illinois, 635 F.Supp. 1281, 1284 (N.D.Ill.1986); see also Master Palletizer Sys., 725 F.Supp. at 1531. While the inclusion of a description of the product, price, quantity, and terms of payment may indicate that the price quotation is an offer rather than a mere invitation to negotiate, the determination of the issue depends primarily upon the intention of the person communicating the quotation as demonstrated by all of the surrounding facts and circumstances. See Interstate Indus., Inc. v. Barclay Indus., Inc., 540 F.2d 868, 871 (7th Cir.1976) (quoting R.E. Crummer & Co. v. Nuveen, 147 F.2d 3, 5 (7th Cir.1945)); Maurice Elec. Supply Co. v. Anderson Safeway Guard Rail Corp., 632 F.Supp. 1082, 1089 (D.D.C.1986) (mem.op.). Thus, to constitute an offer, a price quotation must “be made under circumstances evidencing the express or implied intent of the offeror that its acceptance shall constitute a binding contract.” Maurice Elec. Supply, 632 F.Supp. at 1087.

[16]    In Interstate Industries, Inc. v. Barclay Industries, Inc., 540 F.2d 868 (7th Cir.1976), the court determined that a letter sent by the defendant to the plaintiff stating that the defendant would be able to manufacture fiberglass panels for the plaintiff pursuant to specified standards at certain prices did not constitute an offer. Among other things, the court found that the letter’s use of the term “price quotation,” lack of language indicating that an offer was being made, and absence of terms regarding quantity, time of delivery, or payment terms established that the letter was not intended as an offer. See id. at 873. Thos. J. Sheehan Co. v. Crane Co., 418 F.2d 642 (8th Cir.1969), cited by the court in Interstate Industries, concluded that a price list for copper tubing which a supplier furnished to a subcontractor in connection with the latter’s bid on a job was merely an invitation to engage in future negotiations. The court observed:

The only evidence of defendant’s alleged September 1963 offer is the oral communication to plaintiff that Crane Company could supply copper for the Mansion House Project at a lower price than originally quoted. Reference was made to the new “Chase” price sheet concerning deliveries in minimum quantities of 5000 pounds or 5000 feet, and that prices for copper would be guaranteed for the “duration of the job.” At this time nothing was stated by the defendant or plaintiff as to (1) the time in which plaintiff had to accept the “offer,” (2) the quantity of copper tubing, fittings, or other supplies to be ordered, (3) the terms of payment or (4) the time when Crane Company promised to perform….

The “Chase” price sheet was nothing more than a circular sent to distributors by the manufacturer, Wolverine. Without other terms of commitment, we find that the proposal as to “price protection” was related only to the quoted price as a condition upon which the supplier would be willing in the future to negotiate a contract of shipment….

Prices and price factors quoted by suppliers to contractors for the purposes of aiding contractors to make bid estimates, without more specific terms, do not obligate the supplier to comply with any purchase order upon whatever terms and conditions the contractor may choose to offer at some undetermined date in the future. The fact that the prices quoted are not withdrawn or that a withdrawal of them is not communicated to the contractor is immaterial. No duty exists to revoke terms which without words of commitment merely quote an existing price at which a contract of purchase might be negotiated.

Thos. J. Sheehan, 418 F.2d at 645-46 (italics in original).

[17]    Similarly, in Day v. Amax, Inc., 701 F.2d 1258 (8th Cir.1983), the Seventh Circuit affirmed the district court’s grant of a directed verdict to the defendant on the issue of whether the defendant’s description of mining equipment and a quotation of prices constituted an offer, reasoning that “[a]lthough questions of intent are usually for the jury to decide … the record discloses no evidence that any of the defendants manifested an intent to enter into a contract with [the plaintiff].” Id. at 1263. Thus, the plaintiff’s evidence that the defendant had given the plaintiff signed writings containing detailed descriptions of the mining equipment and the terms of sale and had set up an escrow account were insufficient to demonstrate the defendant’s intent to enter into a contract. See
id. at 1264-65; accord
Maurice Elec. Supply, 632 F.Supp. at 1088 (concluding that the defendant’s price quote “was simply a statement of price for three individual high mast poles of varying height” because “[i]t did not specify quality or quantity, time and place of delivery, or terms of payment” and “[t]here was no promise that the quote would remain open for a specified period of time”).

[18]    In contrast to the cases discussed above, the court in Bergquist Co. v. Sunroc Corp., 777 F.Supp. 1236 (E.D.Pa.1991), found that the question of whether the price quotation at issue constituted an offer was a question of fact for the jury. Some of the factors cited by the court as creating an issue for the jury were: (i) the price quotation was developed by the defendant after the parties had engaged in substantial negotiations; (ii) the quotation included a description of the product, a list of various quantities at various prices, terms of payment, and delivery terms; (iii) the quotation contained the statement “This quotation is offered for your acceptance within 30 days”; and (iv) the price which the purchaser paid was the price listed in the price quotation rather than the price listed in the purchaser’s subsequent purchase order. See
id. at 1249.

[19]    In this case, the facts before the district court furnished a sufficient basis for it to conclude as a matter of law that the contract was formed when Lewis signed the fax from Ratcliffe on December 1, 1995, rather than when Lewis told Ratcliffe to order the materials on November 22, 1995. In particular, neither the November 8 nor the November 13 price quotations contained words indicating that Ratcliffe intended to make an offer to Dyno. The word “Estimate” was printed at the top of the document faxed on November 8, and the message “Please call” was printed on the cover sheet for the document faxed on November 13. These words are indicative of an invitation to engage in future negotiations rather than an offer to enter into a contract. Although both price lists set forth descriptions of the materials, prices, and quantities, nothing was stated about the place of delivery, time of performance, or terms of payment. See
Litton Microwave Cooking Prods., 15 F.3d at 795 (rejecting the contention that the defendant’s price letters and catalogs, which failed to address the place of delivery, quantities, and availability of parts to be purchased were not offers). Finally, the fact that Lewis voluntarily signed the December 1 fax demonstrated that he understood that a binding contract had not been formed as a result of the previous price quotations sent by Ratcliffe. In light of these facts, we agree with the district court that McWane’s price quotations did not constitute offers and that the contract was formed on December 1, 1995.

B. Motion for New Trial

[Students may wish to skim the rest of this opinion because it deals with issues that, though interesting, are peripheral to our discussion of offer.]

[20]    Dyno also contends that the trial court erred in denying its motion for a new trial. Dyno argued to the district court that it was entitled to a new trial because the district court made several erroneous rulings on evidentiary issues and jury instructions. Motions for a new trial are addressed to the sound discretion of the trial court. See
Hopkins v. Coen, 431 F.2d 1055, 1059 (6th Cir.1970). We review a district court’s denial of a motion for a new trial under an abuse of discretion standard. See
Holmes v. City of Massillon, 78 F.3d 1041, 1045 (6th Cir.1996). An abuse of discretion occurs when this Court has “a definite and firm conviction that the trial court committed a clear error in judgment.” Logan v. Dayton Hudson Corp., 865 F.2d 789, 790 (6th Cir.1989).

1. Evidentiary Issues

[21]    Dyno first argues that the district court erred in allowing testimony concerning Lewis’ familiarity with McWane’s standard purchase order, including its terms and conditions, based on Lewis’ prior dealings with McWane as an employee of Reynolds. Dyno argues that Lewis’ prior dealings with McWane as an employee of Reynolds are completely irrelevant to the issue of whether the contract between Dyno and McWane included a limitation of liability provision and that this evidence confused the jury and caused prejudicial error.

[22]    We agree with the district court that the evidence about Lewis’ prior dealings with McWane, particularly as it related to Lewis’ knowledge of McWane’s standard terms and conditions, was relevant and properly admitted. The faxed copy of the purchase order signed by Lewis on December 1, 1995, stated on the front in large print directly above his signature that the purchase order was subject to the terms and conditions on the reverse side. There is no disputing that McWane intended those terms and conditions on the back of the purchase order to be part of the contract but that Ratcliffe inadvertently failed to fax the back of the purchase order to Lewis. Therefore, Lewis’ knowledge of those terms or his knowledge that McWane used standard terms and conditions in its sales, based on his prior dealings with McWane, was particularly relevant to whether those terms and conditions became part of the contract. The jury could properly determine whether Lewis knew or should have known about the limitation of liability in McWane’s standard terms and conditions, and therefore intended that the limitation of liability be part of the contract.

[23]    Dyno next contends that the district court abused its discretion and committed prejudicial error when it refused to admit Lewis’ testimony that McWane had waived its limitation of liability for consequential damages on several occasions in its dealings with Reynolds while Lewis was an employee of that company. Dyno contends that if Lewis’ prior dealings with McWane as an employee of Reynolds were relevant, McWane’s waiver of its limitation of liability clause for Reynolds was also relevant.

[24]    We agree with the decision to exclude this evidence because its admission would have likely caused jury confusion. The issue for the jury was whether McWane’s standard terms and conditions were part of the contract, not whether those terms and conditions would be enforced. Had the district court admitted the evidence, McWane would have been entitled to explore the circumstances under which consequential damages were allegedly paid and explain why those circumstances were different from those at issue in the case. The whole foray into the issue, which was collateral to the actual issues at trial, would have caused substantial prejudice to McWane. Furthermore, McWane’s terms and conditions stated that any waiver of a right by McWane in a particular instance would not constitute a future waiver of that right.

[25]    Dyno’s final evidentiary argument is that the district court erred in admitting Federal Express delivery records generated from Federal Express’ computer system. McWane sought to lay the foundation for introduction of these records under the business records exception to the hearsay rule through the testimony of Fred Jacobs, the Operations Manager at the Federal Express office in Wauseon, Ohio. Jacobs explained that he was fully familiar with Federal Express’ system for moving and tracking packages and testified that these records were generated and kept in the regular course of business by Federal Express in its centralized computer system in Memphis, Tennessee.

[26]    Dyno objected to the admission of the records, arguing that the records were not under Jacobs’ “custody or control” because: (1) he was not responsible for the geographic area in Ohio where the package was shipped; and (2) the computer records were printed in Memphis. Dyno contends that because these records were not under Jacobs’ custody or control, Jacobs could not lay a proper foundation for introduction of the records and they are therefore inadmissible as hearsay.

[27]    Federal Rule of Evidence 803(6) provides that the following evidence is not excluded by the hearsay rule:

A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of the information or the method or circumstances of preparation indicate lack of trustworthiness….

Fed. R. Evid. 803(6).

[28]    While Dyno is correct that Jacobs could not lay a foundation for introduction of the Federal Express records under Rule 803(6) as a “custodian” of the records, Jacobs would be a proper witness to lay a foundation as an “other qualified witness” as described in the Rule. To be an “other qualified witness,” it is not necessary that the person laying the foundation for the introduction of the business record have personal knowledge of their preparation. See
United States v. Franks, 939 F.2d 600, 602-03 (8th Cir.1991) (rejecting the defendant’s contention that the district court erred in admitting Federal Express records on the basis that the witness laying the foundation was unable to determine which employees prepared delivery records and airbills). All that is required of the witness is that he or she be familiar with the record-keeping procedures of the organization. See
United States v. Wables, 731 F.2d 440, 449 (7th Cir.1984)(stating that “[i]t is clear that, in admitting documents under the business records exception to the hearsay rule, ‘the testimony of the custodian or otherwise qualified witness who can explain the record-keeping of his organization is ordinarily essential’ “) (quoting 4 Weinstein, Evidence ¶ 803(6)[02] (1981)); NLRB v. First Termite Control Co., 646 F.2d 424, 427 (9th Cir.1981) (noting that through the custodian or “other qualified witness” requirement, Rule 803(6) “insures the presence of some individual at trial who can testify to the methods of keeping the information”). Thus, in United States v. Hathaway, 798 F.2d 902 (6th Cir.1986), we stated that “[w]hen a witness is used to lay the foundation for admitting records under Rule 803(6), all that is required is that the witness be familiar with the record keeping system.” Hathaway, 798 F.2d at 906. In that case, we rejected the defendant’s contention that the government could not lay a foundation through the testimony of an FBI agent for the admission of records seized from the defendant’s business offices under the business records exception. We found “no reason why a proper foundation for application of Rule 803(6) cannot be laid, in part or in whole, by the testimony of a government agent or other person outside the organization whose records are sought to be admitted.” Id. at 906; see also
Zayre Corp. v. S.M. & R. Co., 882 F.2d 1145, 1150 (7th Cir.1989) (noting that a person qualified to lay the foundation under Rule 803(6) need not even be an employee of the entity keeping the records, as long as the witness understands the system by which they are made).

[29]    Jacobs testified in depth about his understanding of Federal Express’ system for delivering and tracking documents, as well as its system for central storage of its voluminous computerized records in Memphis. That Jacobs was not involved in the preparation of the documents or that he did not know who prepared them were not matters that precluded the admission of the documents as business records. Therefore, the district court did not abuse its discretion in admitting the Federal Express records.

[30]    Furthermore, there was other evidence from which the jury could have concluded that Dyno received the Federal Express package by December 1, 1995. For instance, McWane also introduced into evidence a copy of a Federal Express invoice kept in its files as a business record, for which there is no dispute that a proper foundation was laid for admission at trial under the business records exception, through the testimony of its custodian, Ratcliffe. The invoice showed that Dyno received the package on November 24, 1995, at 8:53 a.m. Accordingly, there was sufficient evidence for the jury to find that Dyno was or should have been aware of McWane’s terms and conditions, including its limitation of liability, at the time it signed the faxed purchase order on December 1, 1995.

2. Jury Instructions

[31]    Dyno argues that the district court committed reversible error in refusing to give two of its proposed jury instructions. Jury instructions in civil cases are reviewed “as a whole to determine whether they adequately inform the jury of the relevant considerations and provide a basis in law for aiding the jury in reaching its decision. A judgment on a jury verdict may be vacated when the instructions, viewed as a whole, were confusing, misleading and prejudicial.” Jones v. Consolidated Rail Corp., 800 F.2d 590, 592 (6th Cir.1986) (citation omitted).

[32]    Dyno first argues that the district court committed reversible error in refusing to give Dyno’s proposed jury instruction number seven, which would have allowed the jury to find that the contract was formed on November 22, 1995, when Lewis told Ratcliffe by telephone to go ahead and order the materials. Because this Court has already affirmed the district court’s conclusion that the contract was formed on December 1, 1995, when Lewis signed the document faxed by Ratcliffe, it would have been improper for the district court to instruct the jury that it could find that the contract was formed on November 22, 1995. Accordingly, the district court properly rejected Dyno’s proposed instruction.

[33]    Dyno’s final argument is that the district court committed reversible error in not giving its proposed instruction number twelve, which read:

McWane must show that the agent designated to receive such information as Federal Express packages actually received and had knowledge of the contents of the package before Dyno is deemed to have knowledge of the disputed terms.

[34]    We believe that this instruction is an erroneous statement of the law and would have placed an unwarranted burden on McWane at trial. The evidence presented at trial was sufficient to allow the jury to find that the Federal Express documents had been delivered to an authorized agent of Dyno because the Federal Express documents were actually located in Dyno’s job file for the Perrysburg project and contained Lewis’ handwriting at the top of the documents. In addition, McWane’s evidence showed that the documents were actually delivered to Dyno’s offices on November 24, 1995. Moreover, McWane could demonstrate that Dyno had received and had knowledge of the contents of the package even if the “agent designated to receive such information” did not actually receive and have knowledge of the contents of the package. For example, if some agent of Dyno other than the “agent designated to receive such information” received the package, that knowledge could be imputed to Dyno. There was also evidence that Lewis had knowledge of the contents of the package, in that he had previous knowledge about McWane’s credit application and terms and conditions, even though he testified that he never received the package. This instruction thus ignored other means by which McWane could have demonstrated Dyno’s knowledge of McWane’s terms and conditions and would have placed an unreasonable burden on McWane to prove actual receipt and review of the documents by the specified Dyno agent. That burden would have been extremely difficult to meet because no one at McWane specifically observed Dyno’s handling and receipt of the November 22 documents. Thus, the failure to give this instruction does not render the instructions, “viewed as a whole, [ ] confusing, misleading and prejudicial….” Jones, 800 F.2d at 592.

[35]    Therefore, Dyno was not entitled to a new trial.


[36]    For the foregoing reasons, the judgment of the district court is AFFIRMED.


1.1.1 Discussion of Dyno Construction v. McWane, Inc.

One way of applying the offer rules is to examine “text” and “context.” The language of the purported offer and the surrounding factual circumstances usually determine whether a court construes a particular manifestation as an offer.

In Dyno Construction, how does an analysis of the text or language of the company’s purported offer influence the court’s determination that the contract was not formed until December 1, 1995?

Is there any evidence about the factual context of these negotiations that tends to reinforce this conclusion?

1.1.2 Hypo on Seed Sale

On September 21, 2000, Amity Seed & Grain Warehouse mailed out samples of clover seed to a large number of dealers in an envelope printed with the following message:

Red clover. 50,000 lbs. like sample. I am asking 24 cents per, f.o.b. Amity, Oregon. Amity Seed & Grain Warehouse.

On October 8, Courteen Seed Co. wired a reply:

Special delivery sample received. Your price too high. Wire firm offer, naming absolutely lowest f.o.b.

The same day, Amity Seed answered this request by telegram:

I am asking 23 cents per pound for the car of red clover seed from which your sample was taken. No. 1 seed, practically no plantain whatever. Have an offer 22 3/4 per pound, f.o.b. Amity.

Courteen responded the next day:

Telegram received. We accept your offer. Ship promptly, route care of Milwaukee Road at Omaha.

Amity Seed has now refused to deliver. How would you apply the offer rules to this situation?


1.2 Principal Case – Lefkowitz v. Great Minneapolis Surplus Store

The following case illustrates an exception that proves the general rule that advertisements are not enforceable as offers. As you read, attend carefully to the court’s reasoning about the two separate ads. Does the opinion’s analysis comport with your understanding of the principles underlying offer doctrine?

Lefkowitz v. Great Minneapolis Surplus Store, Inc.

Supreme Court of Minnesota

251 Minn. 188, 86 N.W.2d 689 (1957)

Murphy, Justice.

[1]    This is an appeal from an order of the Municipal Court of Minneapolis denying the motion of the defendant for amended findings of fact, or, in the alternative, for a new trial. The order for judgment awarded the plaintiff the sum of $138.50 as damages for breach of contract.

[2]    This case grows out of the alleged refusal of the defendant to sell to the plaintiff a certain fur piece which it had offered for sale in a newspaper advertisement. It appears from the record that on April 6, 1956, the defendant published the following advertisement in a Minneapolis newspaper:

Saturday 9 A.M. Sharp
3 Brand New Fur Coats
Worth to $100.00
First Come First Served
$1 Each

[3]    On April 13, the defendant again published an advertisement in the same newspaper as follows:

Saturday 9 A.M.
2 Brand New Pastel
Mink 3-Skin Scarfs
Selling for $89.50
Out they go
Saturday. Each ……… $1.00

1 Black Lapin Stole
worth $139.50 ………. $1.00

First Come — First Served

[4]    The record supports the findings of the court that on each of the Saturdays following the publication of the above-described ads the plaintiff was the first to present himself at the appropriate counter in the defendant’s store and on each occasion demanded the coat and the stole so advertised and indicated his readiness to pay the sale price of $1. On both occasions, the defendant refused to sell the merchandise to the plaintiff, stating on the first occasion that by a ‘house rule’ the offer was intended for women only and sales would not be made to men, and on the second visit that plaintiff knew defendant’s house rules.

[5]    The trial court properly disallowed plaintiff’s claim for the value of the fur coats since the value of these articles was speculative and uncertain. The only evidence of value was the advertisement itself to the effect that the coats were “Worth to $100.00,” how much less being speculative especially in view of the price for which they were offered for sale. With reference to the offer of the defendant on April 13, 1956, to sell the “1 Black Lapin Stole…worth $139.50…” the trial court held that the value of this article was established and granted judgment in favor of the plaintiff for that amount less the $1 quoted purchase price.

[6]    The defendant contends that a newspaper advertisement offering items of merchandise for sale at a named price is a “unilateral offer” which may be withdrawn without notice. He relies upon authorities which hold that, where an advertiser publishes in a newspaper that he has a certain quantity or quality of goods which he wants to dispose of at certain prices and on certain terms, such advertisements are not offers which become contracts as soon as any person to whose notice they may come signifies his acceptance by notifying the other that he will take a certain quantity of them. Such advertisements have been construed as an invitation for an offer of sale on the terms stated, which offer, when received, may be accepted or rejected and which therefore does not become a contract of sale until accepted by the seller; and until a contract has been so made, the seller may modify or revoke such prices or terms. Montgomery Ward & Co. v. Johnson, 209 Mass. 89, 95 N.W. 290; Nickel v. Theresa Farmers Co-op. Ass’n, 247 Wis. 412, 20 N.W.2d 117; Lovett v. Frederick Loeser & Co. Inc., 124 Misc. 81, 207 N.Y.S. 753; Schenectady Stove Co. v. Holbrook, 101 N.Y. 45, 4 N.E. 4; Georgian Co. v. Bloom, 27 Ga. App. 468, 108 S.E. 813; Craft v. Elder & Johnson Co., 38 N.E.2d 416, 34 Ohio L.A. 603; Annotation, 157 A.L.R. 746.

[7]    The defendant relies principally on Craft v. Elder & Johnston Co., supra. In that case, the court discussed the legal effect of an advertisement offering for sale, as a one-day special, an electric sewing machine at a named price. The view was expressed that the advertisement was (38 N.E.2d 417, 34 Ohio L.A. 605) “not an offer made to any specific person but was made to the public generally. Thereby it would be properly designated as a unilateral offer and not being supported by any consideration could be withdrawn at will and without notice.” It is true that such an offer may be withdrawn before acceptance. Since all offers are by their nature unilateral because they are necessarily made by one party or on one side in the negotiation of a contract, the distinction made in that decision between a unilateral offer and a unilateral contract is not clear. On the facts before us we are concerned with whether the advertisement constituted an offer, and, if so, whether the plaintiff’s conduct constituted an acceptance.

[8]    There are numerous authorities which hold that a particular advertisement in a newspaper or circular letter relating to a sale of articles may be construed by the court as constituting an offer, acceptance of which would complete a contract. J. E. Pinkham Lumber Co. v. C. W. Griffin & Co., 212 Ala. 341, 102 So. 689; Seymour v. Armstrong & Kassebaum, 62 Kan. 720, 64 P. 612; Payne v. Lautz Bros. & Co., City Ct., 166 N.Y.S. 844, affirmed, 168 N.Y.S. 369, affirmed, 185 App.Div. 904, 171 N.Y.S. 1094; Arnold v. Phillips, 1 Ohio Dec. Reprint 195, 3 West. Law J. 448; Oliver v. Henley, Tex. Civ. App., 21 S.W.2d 576; Annotation, 157 A.L.R. 744, 746.

[9]    The test of whether a binding obligation may originate in advertisements addressed to the general public is “whether the facts show that some performance was promised in positive terms in return for something requested.” 1 Williston, Contracts (Rev. ed.) § 27.

[10]    The authorities above cited emphasize that, where the offer is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract. The most recent case on the subject is Johnson v. Capital City Ford Co., La. App., 85 So.2d 75, in which the court pointed out that a newspaper advertisement relating to the purchase and sale of automobiles may constitute an offer, acceptance of which will consummate a contract and create an obligation in the offeror to perform according to the terms of the published offer.

[11]    Whether in any individual instance a newspaper advertisement is an offer rather than an invitation to make an offer depends on the legal intention of the parties and the surrounding circumstances. Annotation, 157 A.L.R. 744, 751; 77 C.J.S., Sales, § 25b; 17 C.J.S., Contracts, § 389. We are of the view on the facts before us that the offer by the defendant of the sale of the Lapin fur was clear, definite, and explicit, and left nothing open for negotiation. The plaintiff having successfully managed to be the first one to appear at the seller’s place of business to be served, as requested by the advertisement, and having offered the stated purchase price of the article, he was entitled to performance on the part of the defendant. We think the trial court was correct in holding that there was in the conduct of the parties a sufficient mutuality of obligation to constitute a contract of sale.

[12]    The defendant contends that the offer was modified by a “house rule” to the effect that only women were qualified to receive the bargains advertised. The advertisement contained no such restriction. This objection may be disposed of briefly by stating that, while an advertiser has the right at any time before acceptance to modify his offer, he does not have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer. Payne v. Lautz Bros. & Co., City Ct., 166 N.Y.S. 844, 848; Mooney v. Daily News Co., 116 Minn. 212, 133 N.W. 573.



1.2.1 Punitive Enforcement

Professors Ian Ayres and Robert Gertner have argued that the Lefkowitz court should have enforced the first advertisement as well as the second one:

Ask yourself the simple question: What kind of ad is the Great Minneapolis Surplus Store going to run the week following the court’s decision? By lending its imprimatur to the indefinite ad, the court allows retailers to induce inefficient consumer reliance with impunity. The Lefkowitz case dramatically illustrates that only by enforcing indefinite offers against the offeror can one drive out indefinite offers.

Lefkowitz was wrongly decided. The defendant’s offer was intentionally vague to induce inefficient reliance on the part of the buyer (Lefkowitz incurred the “shoe leather” costs of traveling to the store). Courts can retain the common law’s general reluctance to enforce indefinite contracts so that both parties will have an incentive to make the contracts more definite. But Lefkowitz illustrates an exception to this general rule. When the indefiniteness is clearly attributable to one party and induces inefficient reliance from the other party, punitive enforcement may be efficient to drive out inefficient offers.

Ian Ayres and Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 107 (1989).

1.2.2 Discussion of Lefkowitz v. Great Minneapolis Surplus Store

See if you can develop an argument that the Lefkowitz court was wrong about both the first and the second advertisements.

In your own experience as a consumer have you seen any evidence that advertisers are worried about making offers?

1.2.3 Hypo on Killer Collecting Reward

Los Angeles authorities announced a $500,000 reward for information leading to the arrest and conviction of a serial killer believed to be responsible for eleven murders. “[Police] have linked these cases as having common threads of evidence – ballistics, DNA and a variety of other forensics,” said Los Angeles city council member Bernard Parks, who sponsored the reward.

Suppose that the killer decides to turn himself in and claim the reward. If city authorities refuse to pay, how would you expect a court to rule on the killer’s claim?

2. Acceptance

To accept an offer is to exercise the power that an offer creates. The Restatement (Second) includes sections defining acceptance and discussing the offeror’s control over the manner of acceptance:

§ 30. Form of Acceptance Invited

(1) An offer may invite or require acceptance to be made by an affirmative answer in words, or by performing or refraining from performing a specified act, or may empower the offeree to make a selection of terms in his acceptance.

(2) Unless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable in the circumstances.

§ 50. Acceptance of Offer Defined; Acceptance by Performance; Acceptance by Promise

(1) Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.

(2) Acceptance by performance requires that at least part of what the offer requests be performed or tendered and includes acceptance by a performance which operates as a return promise.

(3) Acceptance by a promise requires that the offeree complete every act essential to the making of the promise.

Professor Corbin elaborates on these doctrinal principles in the following terms:

An acceptance is a voluntary act of the offeree whereby he exercises the power conferred on him by the offer, and thereby creates the set of legal relations called a contract. What acts are sufficient to secure this purpose? We must look first to the terms in which the offer was expressed, either by words or by other conduct. The offeror is the creator of the power and at the time of its creation he has full control over both the fact of its existence and its terms. The offeror has, in the beginning, full power to determine the acts that are to constitute acceptance. After he has once created the power, he may lose his control over it, and may become disabled to change or revoke it; but the fact that, in the beginning, the offeror has full control … is the characteristic that distinguishes contractual relations from noncontractual ones. After the offeror has created the power [of acceptance], the legal consequences are out of his hands, and he may be brought into numerous consequential relations of which he did not dream, and to which he might not have consented. These later relations are nevertheless called contractual.

Arthur Corbin, Offer and Acceptance, and Some of the Resulting Legal Relations, 26 Yale L.J. 169, 199-200 (1917),


2.1 Principal Case – Ever-Tite Roofing Corp. v. Green

Ever-Tite Roofing Corp. v. Green

Court of Appeals of Louisiana

83 So. 2d 449 (1955)

Ayres, Judge.

[1]    This is an action for damages allegedly sustained by plaintiff as the result of the breach by the defendants of a written contract for the re-roofing of defendants’ residence. Defendants denied that their written proposal or offer was ever accepted by plaintiff in the manner stipulated therein for its acceptance, and hence contended no contract was ever entered into. The trial court sustained defendants’ defense and rejected plaintiff’s demands and dismissed its suit at its costs. From the judgment thus rendered and signed, plaintiff appealed.

[2]    Defendants executed and signed an instrument June 10, 1953, for the purpose of obtaining the services of plaintiff in re-roofing their residence situated in Webster Parish, Louisiana. The document set out in detail the work to be done and the price therefor to be paid in monthly installments. This instrument was likewise signed by plaintiff’s sales representative, who, however, was without authority to accept the contract for and on behalf of the plaintiff. This alleged contract contained these provisions:

This agreement shall become binding only upon written acceptance hereof, by the principal or authorized officer of the Contractor, or upon commencing performance of the work. This contract is Not Subject to Cancellation. It is understood and agreed that this contract is payable at office of Ever-Tite Roofing Corporation, 5203 Telephone, Houston, Texas. It is understood and agreed that this Contract provides for attorney’s fees and in no case less than ten per cent attorney’s fees in the event same is placed in the hands of an attorney for collecting or collected through any court, and further provides for accelerated maturity for failure to pay any installment of principal or interest thereon when due.

This written agreement is the only and entire contract covering the subject matter hereof and no other representations have been made unto Owner except these herein contained. No guarantee on repair work, partial roof jobs, or paint jobs. (Emphasis supplied.)

[3]    Inasmuch as this work was to be performed entirely on credit, it was necessary for plaintiff to obtain credit reports and approval from the lending institution which was to finance said contract. With this procedure defendants were more or less familiar and knew their credit rating would have to be checked and a report made. On receipt of the proposed contract in plaintiff’s office on the day following its execution, plaintiff requested a credit report, which was made after investigation and which was received in due course and submitted by plaintiff to the lending agency. Additional information was requested by this institution, which was likewise in due course transmitted to the institution, which then gave its approval.

[4]    The day immediately following this approval, which was either June 18 or 19, 1953, plaintiff engaged its workmen and two trucks, loaded the trucks with the necessary roofing materials and proceeded from Shreveport to defendants’ residence for the purpose of doing the work and performing the services allegedly contracted for the defendants. Upon their arrival at defendants’ residence, the workmen found others in the performance of the work which plaintiff had contracted to do. Defendants notified plaintiff’s workmen that the work had been contracted to other parties two days before and forbade them to do the work.

[5]    Formal acceptance of the contract was not made under the signature and approval of an agent of plaintiff. It was, however, the intention of plaintiff to accept the contract by commencing the work, which was one of the ways provided for in the instrument for its acceptance, as will be shown by reference to the extract from the contract quoted hereinabove. Prior to this time, however, defendants had determined on a course of abrogating the agreement and engaged other workmen without notice thereof to plaintiff.

[6]    The basis of the judgment appealed was that defendants had timely notified plaintiff before “commencing performance of work.” The trial court held that notice to plaintiff’s workmen upon their arrival with the materials that defendants did not desire them to commence the actual work was sufficient and timely to signify their intention to withdraw from the contract. With this conclusion we find ourselves unable to agree.

[7]    Defendants’ attempt to justify their delay in thus notifying plaintiff for the reason they did not know where or how to contact plaintiff is without merit. The contract itself, a copy of which was left with them, conspicuously displayed plaintiff’s name, address and telephone number. Be that as it may, defendants at no time, from June 10, 1953, until plaintiff’s workmen arrived for the purpose of commencing the work, notified or attempted to notify plaintiff of their intention to abrogate, terminate or cancel the contract.

[8]    Defendants evidently knew this work was to be processed through plaintiff’s Shreveport office. The record discloses no unreasonable delay on plaintiff’s part in receiving, processing or accepting the contract or in commencing the work contracted to be done. No time limit was specified in the contract within which it was to be accepted or within which the work was to be begun. It was nevertheless understood between the parties that some delay would ensue before the acceptance of the contract and the commencement of the work, due to the necessity of compliance with the requirements relative to financing the job through a lending agency. The evidence as referred to hereinabove shows that plaintiff proceeded with due diligence.

[9]    The general rule of law is that an offer proposed may be withdrawn before its acceptance and that no obligation is incurred thereby. This is, however, not without exceptions. For instance, Restatement of the Law of Contracts stated:

(1) The power to create a contract by acceptance of an offer terminates at the time specified in the offer, or, if no time is specified, at the end of a reasonable time. What is a reasonable time is a question of fact depending on the nature of the contract proposed, the usages of business and other circumstances of the case which the offeree at the time of his acceptance either knows or has reason to know.

[10]    These principles are recognized in the Civil Code. LSA-C.C. Art. 1800 provides that an offer is incomplete as a contract until its acceptance and that before its acceptance the offer may be withdrawn. However, this general rule is modified by the provisions of LSA-C.C. Arts. 1801, 1802, 1804 and 1809, which read as follows:

Art. 1801. The party proposing shall be presumed to continue in the intention, which his proposal expressed, if, on receiving the unqualified assent of him to whom the proposition is made, he do not signify the change of his intention.

Art. 1802. He is bound by his proposition, and the signification of his dissent will be of no avail, if the proposition be made in terms, which evince a design to give the other party the right of concluding the contract by his assent; and if that assent be given within such time as the situation of the parties and the nature of the contract shall prove that it was the intention of the proposer to allow….

Art. 1804. The acceptance needs (need) not be made by the same act, or in point of time, immediately after the proposition; if made at any time before the person who offers or promises has changed his mind, or may reasonably be presumed to have done so, it is sufficient….

Art. 1809. The obligation of a contract not being complete, until the acceptance, or in cases where it is implied by law, until the circumstances, which raise such implication, are known to the party proposing; he may therefore revoke his offer or proposition before such acceptance, but not without allowing such reasonable time as from the terms of his offer he has given, or from the circumstances of the case he may be supposed to have intended to give to the party, to communicate his determination. (Emphasis supplied.)

[11]    Therefore, since the contract did not specify the time within which it was to be accepted or within which the work was to have been commenced, a reasonable time must be allowed therefor in accordance with the facts and circumstances and the evident intention of the parties. A reasonable time is contemplated where no time is expressed. What is a reasonable time depends more or less upon the circumstances surrounding each particular case. The delays to process defendants’ application were not unusual. The contract was accepted by plaintiff by the commencement of the performance of the work contracted to be done. This commencement began with the loading of the trucks with the necessary materials in Shreveport and transporting such materials and the workmen to defendants’ residence. Actual commencement or performance of the work therefore began before any notice of dissent by defendants was given plaintiff. The proposition and its acceptance thus became a completed contract.

[12]    By their aforesaid acts defendants breached the contract. They employed others to do the work contracted to be done by plaintiff and forbade plaintiff’s workmen to engage upon that undertaking. By this breach defendants are legally bound to respond to plaintiff in damages. LSA-C.C. Art. 1930 provides:

The obligations of contract (contracts) extending to whatsoever is incident to such contracts, the party who violates them, is liable, as one of the incidents of his obligations, to the payment of the damages, which the other party has sustained by his default.

[13]    The same authority in Art. 1934 provides the measure of damages for the breach of a contract. This article, in part, states:

Where the object of the contract is anything but the payment of money, the damages due to the creditor for its breach are the amount of the loss he has sustained, and the profit of which he has been deprived,….

Plaintiff expended the sum of $85.37 in loading the trucks in Shreveport with materials and in transporting them to the site of defendants’ residence in Webster Parish and in unloading them on their return, and for wages for the workmen for the time consumed. Plaintiff’s Shreveport manager testified that the expected profit on this job was $226. None of this evidence is controverted or contradicted in any manner.

[14]    True, as plaintiff alleges, the contract provides for attorney’s fees where an attorney is employed to collect under the contract, but this is not an action on the contract or to collect under the contract but is an action for damages for a breach of the contract. The contract in that respect is silent with reference to attorney’s fees. In the absence of an agreement for the payment of attorney’s fees or of some law authorizing the same, such fees are not allowed.

[15]    For the reasons assigned, the judgment appealed is annulled, avoided, reversed and set aside and there is now judgment in favor of plaintiff, Ever-Tite Roofing Corporation, against the defendants, G. T. Green and Mrs. Jessie Fay Green, for the full sum of $311.37, with 5 per cent per annum interest thereon from judicial demand until paid, and for all costs.

Reversed and rendered.


2.1.1 Selecting the Permissible Mode of Acceptance

Both the Restatement (Second) of Contracts (1981) and the Uniform Commercial Code include rules to govern the permissible mode of acceptance. Here is how the Restatement (Second) addresses the issue:

§ 32. Invitation of Promise or Performance

In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses.

§ 60. Acceptance of Offer Which States Place, Time or Manner of Acceptance

If an offer prescribes the place, time or manner of acceptance its terms in this respect must be complied with in order to create a contract. If an offer merely suggests a permitted place, time or manner of acceptance, another method of acceptance is not precluded.

The UCC specifies similarly permissive rules for situations in which the offer leaves open the means of acceptance but makes the offeror “master of the offer” when she chooses to specify how it should be accepted.

§ 2-206. Offer and Acceptance in Formation of Contract

(1) Unless otherwise unambiguously indicated by the language or circumstances

(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;

(b) an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.

(2) Where the beginning of a requested performance is a reasonable mode of acceptance an offeror who is not notified of acceptance within a reasonable time may treat the offer as having lapsed before acceptance.

2.1.2 Antonucci v. Stevens Dodge

Leonard Antonucci ordered a new “Club Cab” pickup truck from Stevens Dodge. The salesman filled out a preprinted order form and Antonucci paid a $500 deposit. The court described the order:

In the bottom lefthand corner of the agreement there is printed in large underlined type: “… THIS ORDER SHALL NOT BECOME BINDING UNTIL ACCEPTED BY DEALER OR HIS AUTHORIZED REPRESENTATIVE.” At the bottom of the paragraph containing this sentence is a blank line under which is printed “purchaser’s signature.” Plaintiff signed on this line. Below this is a blank line which has printed before it “Accepted By.” Under this line is printed “Dealer or his Authorized Representative.” This line bears no signature.

On the back of the agreement are printed ten conditions. The heading on top of this page states: “It is further understood and agreed: The order on the reverse side hereof is subject to the following terms and conditions which have been mutually agreed upon.” Paragraph 10 states: “This order is subject to acceptance by the dealer, which acceptance shall be signified by the signature of Dealer, Dealer’s Manager or other authorized signature on the reverse side hereof.”

Antonucci v. Stevens Dodge, Inc., 73 Misc. 2d 173, 340 N.Y.S. 2d 979 (1973).

When the truck arrived, a controversy arose about whether the model delivered was the “Club Cab” that Antonucci had ordered. What result would you expect when Antonucci sues Stevens Dodge to recover his deposit?

2.1.3 Discussion of Ever-Tite Roofing v. Green

What would have happened in Ever-Tite if the form contract read like the agreement in Antonucci v. Stevens Dodge (e.g., “This agreement shall not become binding until signed by contractor or his authorized representative.”)?

Suppose as well that the Greens let Ever-Tite begin work on their roof. Could they later repudiate on the ground that the contractor didn’t sign the contract?

Now suppose that the contract said: “This agreement is not binding until accepted. Acceptance should be executed on the acknowledgement copy and returned to the client/owner.” How would you expect a court to resolve this variation on the facts of Ever-Tite?

Does the Restatement (Second) have anything to say about this situation?

As a general principle, who has the power to determine the manner in which an offer will be accepted?

2.2 Principal Case – Ciaramella v. Reader’s Digest Association

Ciaramella v. Reader’s Digest Association, Inc.

United States Court of Appeals, Second Circuit

131 F.3d 320 (1997)

Oakes, Senior Circuit Judge:

[1]    Plaintiff filed suit against Reader’s Digest Association (“RDA”) alleging employment discrimination under the Americans with Disabilities Act, 42 U.S.C. §§ 12101-12213 (1994) (“ADA”), and article 15 of the New York State Executive Law, N.Y. Exec. Law §§ 290-301 (McKinney 1993), and also violations of the Employee Retirement Income Security Act, 29 U.S.C. §§ 1001-1461 (1994) (“ERISA”). Shortly after the commencement of the action, the parties negotiated a settlement which Ciaramella later refused to sign. RDA moved for an order to enforce the settlement agreement. The United States District Court for the Southern District of New York (Charles L. Brieant, J.), granted the motion and dismissed the plaintiff’s complaint with prejudice. Ciaramella argues that enforcement of the settlement agreement was improper because he had never signed the written agreement and the parties had specifically agreed that the settlement would not become binding until signed by all the parties. We agree, and reverse.


[2]    In November 1995, Ciaramella filed suit against his former employer, RDA, alleging that RDA failed to give him reasonable accommodations for his disability of chronic depression and subsequently terminated his employment in violation of the ADA and article 15 of New York State Executive Law. Ciaramella also raised a claim under ERISA for failure to pay severance benefits.

[3]    Before the exchange of any discovery, the parties entered into settlement negotiations. The negotiations resulted in an agreement in principle to settle the case in May, 1996. RDA prepared a draft agreement and sent it to Ciaramella’s then attorney, Herbert Eisenberg, for review. This draft, as well as all subsequent copies, contained language indicating that the settlement would not be effective until executed by all the parties and their attorneys. Eisenberg explained the terms of the settlement to Ciaramella, who authorized Eisenberg to accept it. Eisenberg then made several suggestions for revision to RDA which were incorporated into a revised draft. After reviewing the revised draft, Eisenberg asked for a few final changes and then allegedly stated to RDA’s lawyer, “We have a deal.” RDA forwarded several execution copies of the settlement to Eisenberg. However, before signing the agreement, Ciaramella consulted a second attorney and ultimately decided that the proposed settlement agreement was not acceptable to him and that he would not sign it. Eisenberg then moved to withdraw as plaintiff’s counsel.

[4]    RDA, claiming that the parties had reached an enforceable oral settlement, filed a motion to enforce the settlement agreement on September 3, 1996. At a hearing on September 13, the district court granted Eisenberg’s motion to withdraw, and stayed proceedings on the motion to enforce the settlement for thirty days to give Ciaramella time to obtain another attorney. On October 25, the district court heard RDA’s motion to enforce the settlement agreement. Ciaramella had not yet obtained substitute counsel and appeared pro se at the hearing. The district court, after considering RDA’s unopposed motion papers and questioning Ciaramella about the formation of the settlement agreement, granted RDA’s motion to enforce the settlement by order dated October 28, 1996. The district court entered a judgment of dismissal on October 29, 1996. This Court has jurisdiction under 28 U.S.C. § 1291.


A. Choice of Law

[5]    An initial question presented is whether New York or federal common law determines whether the parties reached a settlement of claims brought under the ADA, ERISA, and state law. The district court analyzed the issue using federal common law and concluded that the parties had intended to enter into a binding oral agreement. We review the district court’s findings of law under a de novo standard, and its factual conclusions under a clearly erroneous standard of review. See Hirschfeld v. Spanakos, 104 F.3d 16, 19 (2d Cir.1997).

[6]    Because we find that there is no material difference between the applicable state law or federal common law standard, we need not decide this question here. See Bowden v. United States, 106 F.3d 433, 439 (D.C.Cir.1997) (declining to decide whether state or federal common law governs the interpretation of a settlement agreement under Title VII where both sources of law dictate the same result); Davidson Pipe Co. v. Laventhol & Horwath, Nos. 84 Civ. 5192(LBS), 84 Civ. 6334(LBS), 1986 WL 2201, at *2 (S.D.N.Y. Feb. 11, 1986) (finding no federal rule that would differ critically from New York’s rule governing the validity of oral settlement agreements). New York relies on settled common law contract principles to determine when parties to a litigation intended to form a binding agreement. See Winston v. Mediafare Entertainment Corp., 777 F.2d 78, 80-81 (2d Cir.1985) (applying principles drawn from the Restatement (Second) of Contracts to determine whether a binding settlement agreement existed under New York law); see also Jim Bouton Corp. v. William Wrigley Jr. Co., 902 F.2d 1074, 1081 (2d Cir.1990) (describing the New York rule of contract formation as “generally accepted”). Under New York law, parties are free to bind themselves orally, and the fact that they contemplate later memorializing their agreement in an executed document will not prevent them from being bound by the oral agreement. However, if the parties intend not to be bound until the agreement is set forth in writing and signed, they will not be bound until then. See Winston, 777 F.2d at 80; V’Soske v. Barwick, 404 F.2d 495, 499 (2d Cir.1968). The intention of the parties on this issue is a question of fact, to be determined by examination of the totality of the circumstances. See International Telemeter Corp. v. Teleprompter Corp., 592 F.2d 49, 56 (2d Cir.1979). This same standard has been applied by courts relying on federal common law. See Taylor v. Gordon Flesch Co., 793 F.2d 858, 862 (7th Cir.1986) (enforcing an oral settlement of a Title VII case where the parties had not specified the need for a final, signed document); Board of Trustees of Sheet Metal Workers Local Union No. 137 Ins. Annuity & Apprenticeship Training Funds v. Vic Constr. Corp., 825 F.Supp. 463, 466 (E.D.N.Y.1993) (adopting the Winston analysis as based on “general contract principles” to uphold an oral settlement of an ERISA case); see also 1 Samuel Williston & Walter H.E. Jaeger, A Treatise on the Law of Contracts § 28 (3d ed. 1957) (“It is … everywhere agreed that if the parties contemplate a reduction to writing of their agreement before it can be considered complete, there is no contract until the writing is signed.”).

[7]    RDA urges us to fashion a federal rule of decision that would disregard this longstanding rule of contract interpretation and would hold parties to an oral settlement whenever their attorneys arrive at an agreement on all material terms. We reject this suggestion. Even in cases where federal courts can choose the governing law to fill gaps in federal legislation, the Supreme Court has directed that state law be applied as the federal rule of decision unless it presents a significant conflict with federal policy. See Atherton v. FDIC, 519 U.S. 213 (1997); O’Melveny & Myers v. FDIC, 512 U.S. 79, 87 (1994) (noting that “cases in which judicial creation of a federal rule would be justified…are…’few and restricted'”) (quoting Wheeldin v. Wheeler, 373 U.S. 647, 651 (1963)).

[8]    We can find no federal objective contained in the ADA or ERISA that would be compromised by the application of the common law rules described above. RDA is correct that at least one of the federal statutes at issue expresses a preference for voluntary settlements of claims. See 42 U.S.C. § 12212 (1994) (encouraging the use of alternative means of dispute resolution, such as settlement, to resolve claims arising under the ADA). However, the common law rule does not conflict with this policy. The rule aims to ascertain and give effect to the intent of the parties at the time of contract. Such a rule promotes settlements that are truly voluntary. See, e.g., Winston, 777 F.2d at 80 (“Because of this freedom to determine the exact point at which an agreement becomes binding, a party can negotiate candidly, secure in the knowledge that he will not be bound until execution of what both parties consider to be final document [sic].”).

[9]    In fact, it is the rule suggested by RDA that would conflict with federal policy. Enforcing premature oral settlements against the expressed intent of one of the parties will not further a policy of encouraging settlements. People may hesitate to enter into negotiations if they cannot control whether and when tentative proposals become binding. We therefore decline to adopt a federal rule concerning the validity of oral agreements that is in conflict with federal policy and the settled common law principles of contract law.

B. Existence of a Binding Agreement

[10]    This court has articulated four factors to guide the inquiry regarding whether parties intended to be bound by a settlement agreement in the absence of a document executed by both sides. Winston, 777 F.2d at 80. We must consider (1) whether there has been an express reservation of the right not to be bound in the absence of a signed writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing. Id. No single factor is decisive, but each provides significant guidance. See R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74-75 (2d Cir.1984) (granting summary judgment where all four factors indicated that the parties had not intended to be bound by an oral franchise agreement). The district court did not explicitly rely on the Winston test, but concluded that based on the evidence the parties intended to enter into a binding oral agreement. Considering the above factors in the context of this case, we are left with the definite and firm conviction that the district court erred in concluding that the parties intended that the unexecuted draft settlement constitute a binding agreement. See United States v. United States Gypsum Co., 333 U.S. 364, 395-97, 68 S.Ct. 525, 542-43, 92 L.Ed. 746 (1948) (finding clear error where trial court’s findings conflicted with uncontroverted documentary evidence); Winston, 777 F.2d at 83 (finding clear error where the district court had enforced an unsigned settlement and three of the four factors indicated that the parties had not intended to be bound in the absence of a signed agreement).

1. Express Reservation

[11]    We find numerous indications in the proposed settlement agreement that the parties did not intend to bind themselves until the settlement had been signed. We must give these statements considerable weight, as courts should avoid frustrating the clearly-expressed intentions of the parties. R.G. Group, 751 F.2d at 75. For instance, in paragraph 10, the agreement states, “This Settlement Agreement and General Release shall not become effective (‘the Effective Date’) until it is signed by Mr. Ciaramella, Davis & Eisenberg, and Reader’s Digest.”

[12]    RDA argues that the effect of paragraph 10 was simply to define the “Effective Date” of the agreement for the purpose of establishing the time period in which RDA was obligated to deliver payment and a letter of reference to Ciaramella. RDA further urges that Ciaramella’s obligation to dismiss the suit was not conditioned on paragraph 10. However, this interpretation is belied by the language of paragraph 2, which addresses RDA’s payment obligation. Paragraph 2 states that RDA must proffer payment “[w]ithin ten (10) business days following the later of (a) the Effective Date of this Settlement Agreement and General Release (as defined by paragraph ten … ) or (b) entry by the Court of the Stipulation of Dismissal With Prejudice” (emphasis added). Under the terms of the proposed settlement, RDA had no obligation to pay Ciaramella until the agreement was signed and became effective. Likewise, under paragraph 12 of the final draft, RDA was not required to send the letter of reference until the agreement was signed. The interpretation that RDA advances, that Ciaramella had an obligation to dismiss the suit regardless of whether the settlement was signed, leaves Ciaramella no consideration for his promise to dismiss the suit. The more reasonable inference to be drawn from the structure of paragraph 2 is that it provided Ciaramella with an incentive to dismiss the suit quickly because he would receive no payment simply by signing the agreement, but that execution was necessary to trigger either parties’ obligations. See, e.g., Davidson Pipe Co., 1986 WL 2201, at *4 (finding that wording in a settlement agreement that placed great significance on the execution date evinced an intent not to create a binding settlement until some formal date of execution).

[13]    Similarly, several other paragraphs of the proposed agreement indicate that the parties contemplated the moment of signing as the point when the settlement would become binding. The agreement’s first paragraph after the WHEREAS clauses reads, “NOW, THEREFORE, with the intent to be legally bound hereby, and in consideration of the mutual promises and covenants contained herein, Reader’s Digest and Ciaramella agree to the terms and conditions set forth below: ….” (emphasis added). This language demonstrates that only the terms of the settlement agreement, and not any preexisting pact, would legally bind the parties. Read in conjunction with paragraph 10, which provides that the settlement agreement is effective only when signed, this paragraph explicitly signals the parties’ intent to bind themselves only at the point of signature. See, e.
g., R.G. Group, 751 F.2d at 71, 76 (finding an explicit reservation of the right not to be bound absent signature in the wording of an agreement that declared, “when duly executed, [this agreement] sets forth your rights and your obligations”). In addition to the language of the first paragraph, paragraph 13 of the final draft
contains a merger clause which states,

This Settlement Agreement and General Release constitutes the complete understanding between the parties, may not be changed orally and supersedes any and all prior agreements between the parties…. No other promises or agreements shall be binding unless in writing and signed by the parties.

[14]    The presence of such a merger clause is persuasive evidence that the parties did not intend to be bound prior to the execution of a written agreement. See, e.
g., R.G. Group, 751 F.2d at 76; McCoy v. New York City Police Dep’t, No. 95 Civ. 4508, 1996 WL 457312, at *2 (S.D.N.Y. Aug.14, 1996) (refusing to enforce a settlement of a § 1983 claim where a signed copy of the settlement agreement containing a merger clause had never been returned by the plaintiff).

[15]    Other parts of the agreement also emphasize the execution of the document. Paragraph 9 states, in relevant part,

Mr. Ciaramella represents and warrants that he … has executed this Settlement Agreement and General Release after consultation with his … legal counsel; … that he voluntarily assents to all the terms and conditions contained therein; and that he is signing the Settlement Agreement and General Release of his own force and will.

[16]    Ciaramella’s signature was meant to signify his voluntary and informed consent to the terms and obligations of the agreement. By not signing, he demonstrated that he withheld such consent.

[17]    The sole communication which might suggest that the parties did not intend to reserve the right to be bound is Eisenberg’s alleged statement to RDA’s counsel, “We have a deal.” However, nothing in the record suggests that either attorney took this statement to be an explicit waiver of the signature requirement. Eisenberg’s statement followed weeks of bargaining over the draft settlement, which at all times clearly expressed the requirement that the agreement be signed to become effective. This Court has held in a similar situation that an attorney’s statement that “a handshake deal” existed was insufficient to overcome “months of bargaining where there were repeated references to the need for a written and signed document, and where neither party had ever … even discussed dropping the writing requirement.” R.G. Group, 751 F.2d at 76; see also Davidson Pipe Co., 1986 WL 2201, at *5 (holding that oral statement, “we have a deal,” made by one attorney to another did not in and of itself preclude a finding that the parties intended to be bound only by an executed contract).

2. Partial Performance

[18]    A second factor for consideration is whether one party has partially performed, and that performance has been accepted by the party disclaiming the existence of an agreement. R.G. Group, 751 F.2d at 75. No evidence of partial performance of the settlement agreement exists here. RDA paid no money to Ciaramella before the district court ordered the settlement enforced, nor did it provide Ciaramella with a letter of reference. These were the two basic elements of consideration that would have been due to Ciaramella under the settlement agreement.

3. Terms Remaining to be Negotiated

[19]    Turning to the third factor, we find that the parties had not yet agreed on all material terms. The execution copy of the settlement agreement contained a new provision at paragraph 12 that was not present in earlier drafts. That provision required RDA to deliver a letter of reference concerning Ciaramella to Eisenberg. The final draft of the settlement contained an example copy of the letter of reference annexed as Exhibit B. Ciaramella was evidently dissatisfied with the example letter. At the October 25, 1996, hearing at which Ciaramella appeared pro se, he attempted to explain to the court that the proposed letter of reference differed from what he had expected. He stated, “The original settlement that was agreed to, the one that was reduced to writing for me to sign had a discrepancy about letters of recommendation. I had requested one thing and the settlement in writing did not represent that.” Because Ciaramella’s attorney resigned when Ciaramella refused to sign the settlement agreement, and RDA thereafter moved to enforce the agreement, Ciaramella never had an opportunity to finish bargaining for the letter he desired.

[20]    In Winston, this Court found that the existence of even “minor” or “technical” points of disagreement in draft settlement documents were sufficient to forestall the conclusion that a final agreement on all terms had been reached. Winston, 777 F.2d at 82-83. By contrast, the letter of reference from RDA was a substantive point of disagreement. It was also, from Ciaramella’s perspective, a material term of the contract since it was part of Ciaramella’s consideration for dismissing the suit. On this basis, we find that the parties here had not yet reached agreement on all terms of the settlement.

4. Type of Agreement That Is Usually Reduced to a Writing

[21]    The final factor, whether the agreement at issue is the type of contract that is usually put in writing, also weighs in Ciaramella’s favor. Settlements of any claim are generally required to be in writing or, at a minimum, made on the record in open court. See, e.g., N.Y. C.P.L.R. § 2104; Cal.Civ.Proc.Code § 664.6 (West 1996). As we stated in Winston, “Where, as here, the parties are adversaries and the purpose of the agreement is to forestall litigation, prudence strongly suggests that their agreement be written in order to make it readily enforceable, and to avoid still further litigation.” Winston, 777 F.2d at 83.

[22]    We have also found that the complexity of the underlying agreement is an indication of whether the parties reasonably could have expected to bind themselves orally. See R.G. Group., 751 F.2d at 76; Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 262-63 (2d Cir.1984) (finding that the magnitude and complexity of a four million dollar sale of six companies under the laws of five different countries reinforced the stated intent of the parties not to be bound until written contracts were signed). While this settlement agreement does not concern a complicated business arrangement, it does span eleven pages of text and contains numerous provisions that will apply into perpetuity. For instance, paragraph 6 determines how future requests for references would be handled, and also states that Ciaramella can never reapply for employment at RDA. Paragraph 7 states that Ciaramella will not publicly disparage RDA and agrees not to disclose the terms of the settlement agreement. In such a case, the requirement that the agreement be in writing and formally executed “simply cannot be a surprise to anyone.” R.G. Group, 751 F.2d at 77; see also Winston, 777 F.2d at 83 (finding a four page settlement agreement that contained obligations that would last over several years sufficiently complex to require reduction to writing).


[23]    In sum, we find that the totality of the evidence before us clearly indicates that Ciaramella never entered into a binding settlement agreement with his former employer. This conclusion is supported by the text of the proposed agreement and by Ciaramella’s testimony at the October 25 hearing. Accordingly, the order enforcing the settlement is vacated and the case remanded for further proceedings. Costs to appellant.


2.2.1 Preliminary Agreements

A frequently recurring fact pattern arises when parties orally express agreement on a deal (or draft a preliminary “agreement in principle”) but they also agree to memorialize their agreement in a more formal writing. When, as in Ciaramella, one of the parties refuses to sign the final written contract, courts sometimes struggle to determine whether the parties intended to be bound by their earlier oral (or incomplete written) agreement. The Restatement (Second) largely punts on this question:

§ 26. Preliminary Negotiations

A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.

§ 27. Existence of Contract Where Written Memorial Is Contemplated

Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.

A prominent federal judge from New York has proposed a more complex approach—the so-called “Leval Test”—that is explained in this Second Circuit opinion:

Parties to proposed … transactions often enter into preliminary agreements, which may provide for the execution of more formal agreements. When they do so and the parties fail to execute a more formal agreement, the issue arises as to whether the preliminary agreement is a binding contract or an unenforceable agreement to agree. Ordinarily, where the parties contemplate further negotiations and the execution of a formal instrument, a preliminary agreement does not create a binding contract. In some circumstances, however, preliminary agreements can create binding obligations. Usually, binding preliminary agreements fall into one of two categories.

The first is a fully binding preliminary agreement, which is created when the parties agree on all the points that require negotiation but agree to memorialize their agreement in a more formal document. Such an agreement is fully binding; it is “preliminary only in form — only in the sense that the parties desire a more elaborate formalization of the agreement.” A binding preliminary agreement binds both sides to their ultimate contractual objective in recognition that, “despite the anticipation of further formalities,” a contract has been reached. Accordingly, a party may demand performance of the transaction even though the parties fail to produce the “more elaborate formalization of the agreement.”

The second type of preliminary agreement, dubbed a “binding preliminary commitment” by Judge Leval, is binding only to a certain degree. It is created when the parties agree on certain major terms, but leave other terms open for further negotiation. The parties “accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement.” In contrast to a fully binding preliminary agreement, a “binding preliminary commitment” “does not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the … objective within the agreed framework.” A party to such a binding preliminary commitment has no right to demand performance of the transaction. Indeed, if a final contract is not agreed upon, the parties may abandon the transaction as long as they have made a good faith effort to close the deal and have not insisted on conditions that do not conform to the preliminary writing.

Hence, if a preliminary agreement is of the first type, the parties are fully bound to carry out the terms of the agreement even if the formal instrument is never executed. If a preliminary agreement is of the second type, the parties are bound only to make a good faith effort to negotiate and agree upon the open terms and a final agreement; if they fail to reach such a final agreement after making a good faith effort to do so, there is no further obligation. Finally, however, if the preliminary writing was not intended to be binding on the parties at all, the writing is a mere proposal, and neither party has an obligation to negotiate further.

Courts confronted with the issue of determining whether a preliminary agreement is binding, as an agreement of either the first or the second type, must keep two competing interests in mind. First, courts must be wary of “trapping parties in surprise contractual obligations that they never intended” to undertake. Second, “courts [must] enforce and preserve agreements that were intended [to be] binding, despite a need for further documentation or further negotiation,” for it is “the aim of contract law to gratify, not to defeat, expectations.” The key, of course, is the intent of the parties: whether the parties intended to be bound, and if so, to what extent. “To discern that intent a court must look to ‘the words and deeds [of the parties] which constitute objective signs in a given set of circumstances.’ ” Subjective evidence of intent, on the other hand, is generally not considered.

Adjustrite Systems, Inc. v. Gab Business Services, Inc., 145 F.3d 543, 549 (2d Cir. 1998).

In view of the uncertainty attending the judicial resolution of these questions, parties to commercial negotiations quite often draft explicit clauses to govern the legal effect of their preliminary agreements. One example of such a clause follows:

This Heads of Agreement (“HOA”) is intended solely as a basis for further discussion and is not intended to be and does not constitute a binding obligation of the parties. No legally binding obligations on the parties will be created, implied, or inferred until appropriate documents in final form are executed and delivered by each of the parties regarding the subject matter of this HOA and containing all other essential terms of an agreed upon transaction. Without limiting the generality of the foregoing, it is the parties’ intent that, until that event, no agreement binding on the parties shall exist and there shall be no obligations whatsoever based on such things as parol evidence, extended negotiations, “handshakes,” oral understandings, or course of conduct (including reliance and changes of position).

2.2.2 Discussion of Ciaramella v. Reader’s Digest Association

What facts in Ciaramella allow the court to hold that “We have a deal” doesn’t mean that the parties have a legally binding deal?

Suppose that the principals of two businesses meet and hash out the basic elements of a merger agreement. They shake hands and say, “It’s a deal.” Then they send their lawyers back to draft a formal contract. What result if one of the parties decides to back out of the deal before signing the formal written agreement? Is this a binding contract?

2.2.3 The Mailbox Rule

Contractual offers and acceptances are sometimes transmitted through the mail. Problems can arise during the period that an offer or acceptance is in transit between the parties. Courts have developed rules to resolve these problems. The most famous is the so-called “mailbox rule” described in the Restatement (Second) of Contracts:

§ 63. Time When Acceptance Takes Effect

Unless the offer provides otherwise,

(a) an acceptance made in a manner and by a medium invited by an offer is operative and completes the manifestation of mutual assent as soon as put out of the offeree’s possession, without regard to whether it ever reaches the offereor; but

(b) an acceptance under an option contract is not operative until received by the offeror.


a. Rationale. It is often said that an offeror who makes an offer by mail makes the post office his agent to receive the acceptance, or that the mailing of a letter of acceptance puts it irrevocably out of the offeree’s control. Under United States postal regulations however, the sender of a letter has long had the power to stop delivery and reclaim the letter. A better explanation of the rule that the acceptance takes effect on dispatch is that the offeree needs a dependable basis for his decision whether to accept. In many legal systems such a basis is provided by the general rule that an offer is irrevocable unless it provides otherwise. The common law provides such a basis through the rule that a revocation of an offer is ineffective if received after an acceptance has been properly dispatched.

c. Revocation of acceptance. The fact that the offeree has power to reclaim his acceptance from the post office or telegraph company does not prevent the acceptance from taking effect on dispatch. Nor, in the absence of additional circumstances, does the actual recapture of the acceptance deprive it of legal effect, though as a practical matter the offeror cannot assert his rights unless he learns of them. An attempt to revoke the acceptance by an overtaking communication is similarly ineffective, even though the revocation is received before the acceptance is received. After mailing an acceptance of a revocable offer, the offeree is not permitted to speculate at the offeror’s expense during the time required for the letter to arrive.

A purported revocation of acceptance may, however, affect the rights of the parties. It may amount to an offer to rescind the contract or to a repudiation of it, or it may bar the offeree by estoppel from enforcing it. In some cases it may be justified as an exercise of a right of stoppage in transit or a demand for assurance of performance. Compare Uniform Commercial Code §§ 2-609, 2-702, 2-705. Or the contract may be voidable for mistake or misrepresentation, §§ 15154, 164. See particularly the provisions of § 153 on unilateral mistake.

§ 66. Acceptance Must Be Properly Dispatched

An acceptance sent by mail or otherwise from a distance is not operative when dispatched, unless it is properly addressed and such other precautions are taken as are ordinarily observed to insure safe transmission of similar messages.

The U.S. Postal Service regulation to which the Restatement’s first comment refers was issued years before the adoption of § 63 and provided:

(c) On receipt of a request for the return of any article of mail matter the postmaster or railway postal clerk to whom such request is addressed shall return such matter in a penalty envelope, to the mailing postmaster, who shall deliver it to the sender upon payment of all expenses and the regular rate of postage on the matter returned….

39 C.F.R. ¶ 10.09, 10.10 (1939 ed.). Despite periodic calls to reform the mailbox rule, courts generally have adhered to this traditional approach to determining the time of acceptance.

Although we will take up revocation in the next section, it is convenient to note here that when parties bargain by mail a corollary of the mailbox rule governs the timing of revocation. The Restatement (Second) of Contracts expresses the rule as follows:

§ 42. Revocation by Communication from Offeror Received by Offeree

An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract.

3. Revocation of Offers

As we have seen, an offer gives an offeree the power to form a contract by accepting. The Restatement (Second) of Contracts describes a number of ways that the offeree’s power to accept may end:

§ 36. Methods of Termination of the Power of Acceptance

(1) An offeree’s power of acceptance may be terminated by

(a) rejection or counter-offer by the offeree, or

(b) lapse of time, or

(c) revocation by the offeror, or

(d) death or incapacity of the offeror or offeree.

(2) In addition, an offeree’s power of acceptance is terminated by the nonoccurrence of any condition of acceptance under the terms of the offer.

We will discuss both the common law and UCC rules governing rejection and counter-offers in the next section. For the moment, note that an offer ordinarily remains open long enough to give the offeror a reasonable opportunity to accept. An oral offer made during a face-to-face or telephone conversation expires at the end of that conversation unless the offeror has indicates a willingness to keep the offer open beyond that time. The offeror nevertheless retains the right to terminate her offer at any subsequent time unless she has also expressly agreed not to revoke it—thus creating a “firm offer.”

Recall that in order to accept an offer of a unilateral contract an offeree must tender a performance rather than a reciprocal promise. The consequences of a revocation are especially acute when an offeror revokes such an offer after the offeree has begun performing. In the following excerpt, a scholar defends the early common law rule, which required full performance for acceptance:

Suppose A says to B, “I will give you $100 if you walk across the Brooklyn Bridge,” and B walks — is there a contract? It is clear that A is not asking B for B’s promise to walk across the Brooklyn Bridge. What A wants from B is the act of walking across the bridge. When B has walked across the bridge there is a contract, and A is then bound to pay to B $100. At that moment there arises a unilateral contract. A has bartered away his volition for B’s act of walking across the Brooklyn Bridge.

When an act is thus wanted in return for a promise, a unilateral contract is created when the act is done. It is clear that only one party is bound. B is not bound to walk across the Brooklyn Bridge, but A is bound to pay B $100 if B does so. Thus, in unilateral contracts, on one side we find merely an act, on the other side a promise.

It is plain that in the Brooklyn Bridge case as first put, what A wants from B is the act of walking across the Brooklyn Bridge. A does not ask for B’s promise to walk across the bridge and B has never given it. B has never bound himself to walk across the bridge. A, however, has bound himself to pay $100 to B, if B does so. Let us suppose that B starts to walk across the Brooklyn Bridge and has gone about one-half of the way across. At that moment A overtakes B and says to him, “I withdraw my offer.” Has B then any rights against A? Again, let us suppose that after A has said, “I withdraw my offer,” B continues to walk across the Brooklyn Bridge and completes the act of crossing.

Under these circumstances, has B any rights against A? In the first of the cases just suggested, A withdrew his offer before B had walked across the bridge. What A wanted from B, what A asked for, was the act of walking across the bridge. Until that was done, B had not given to A what A had requested. The acceptance by B of A’s offer could be nothing but the act on B’s part of crossing the bridge. It is elementary that an offeror may withdraw his offer until it has been accepted. It follows logically that A is perfectly within his rights in withdrawing his offer before B has accepted it by walking across the bridge — the act contemplated by the offeror and the offeree as the acceptance of the offer.

Maurice Wormser, The True Conception of Unilateral Contracts, 26 Yale L.J. 136-38 (1916).

More recent decisions have rejected this traditional approach. Courts now protect the offeree who has begun performance by barring revocation of the offer until the offeree has had a reasonable opportunity to complete the requested performance. The Restatement (Second) of Contracts sensibly describes the resulting obligation as an option contract.

§ 45. Option Contract Created by Part Performance or Tender

(1) Where an offer invites an offeree to accept by rendering a performance and does not invite promissory acceptance, an option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.

(2) The offeror’s duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

3.1 Irrevocable Offers

The rule for unilateral contracts described in Restatement (Second) § 45 creates an implied option contract once an offeree has begun performing and gives her a reasonable time to complete performance. In other circumstances, however, parties may prefer to create an express option contract.

Imagine, for example, that Amy is considering whether to expand her grape vineyard by buying additional acreage from Julian. Her decision about the purchase depends on the results of extensive soil tests and a detailed marketing study. Amy is unwilling to incur these costs unless she has some assurance that Julian will not sell the property to someone else. Recognizing Amy’s predicament, suppose that Julian offers to sell the acreage to her for $450,000 and further agrees to keep this offer open for one month while she completes her investigations.

We will see shortly that Julian’s offer may be binding as an option contract under Restatement (Second) § 87 if it satisfies certain formal requirements or, in some cases, simply as a result of Amy’s reliance on the offer. However, Amy may worry that enforcement under these provisions is too uncertain. In order to form an express option contract, Amy needs to pay Julian for the option. If she pays $200 in exchange for Julian’s promise to keep the offer open, the parties will have formed a binding option contract. The Restatement (Second) of Contracts endorses this approach:

§ 25. Option Contracts

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.

It is frequently not feasible, however, to pay for an option contract. Under the Uniform Commercial Code, a merchant may also make a “firm offer” that will be binding as an option contract. The statutory provisions governing firm offers combine both formal and substantive requirements.

§ 2-205. Firm Offers

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 terms of assurance on a form supplied by the offeree must be separately signed by the offeror.

Students should also read Official Comments 1-5 from an outside source.

The Restatement (Second) provides a somewhat similar doctrinal mechanism for making firm offers.

§ 87. Option Contract

(1) An offer is binding as an option contract if it

(a) 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; or

(b) is made irrevocable by statute.

(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.

3.1.1 Discussion of Revocation and Firm Offers

As compared to an express option contract, both U.C.C. § 2-205 and Restatement (Second) § 87 involve far more subtle legal issues. Our next principal case, Pavel Enterprises v. A.S. Johnson Co., illustrates the application of the common law rules to construction bidding. But first consider a couple of simpler factual settings.

Suppose, for example, that I offer my son Eric $500 to juggle three tennis balls 5,000 times in succession. When Eric gets to 4,950, I yell “I revoke.” What would Wormser say about my attempted revocation?

What if anything is wrong with Wormser’s reasoning? Does Wormser accurately describe the agreement that the parties would have reached if they had considered this issue carefully at the outset of their relationship—the “hypothetical bargain” that they would have made? How would you apply this hypothetical bargain analysis to our juggling hypothetical?

Consider a more complicated contractual setting. What if Glen offers Rachel $500 to paint his garage? Rachel begins the prep work for this painting project (e.g., scraping, sanding and caulking) and then disappears for a month or two. Is Glen still obliged to let Rachel finish the painting work?

3.2 Principal Case – Pavel Enterprises, Inc. v. A.S. Johnson Co.

Pavel Enterprises, Inc. v. A.S. Johnson Company, Inc.

Court of Appeals of Maryland

342 Md. 143, 674 A.2d 521 (1996)

Karwacki, Judge.

[1]    In this case we are invited to adapt the “modern” contractual theory of detrimental reliance, or promissory estoppel, to the relationship between general contractors and their subcontractors. Although the theory of detrimental reliance is available to general contractors, it is not applicable to the facts of this case. For that reason, and because there was no traditional bilateral contract formed, we shall affirm the trial court.


[2]    The National Institutes of Health [hereinafter, “NIH”], solicited bids for a renovation project on Building 30 of its Bethesda, Maryland campus. The proposed work entailed some demolition work, but the major component of the job was mechanical, including heating, ventilation and air conditioning [“HVAC”]. Pavel Enterprises Incorporated [hereinafter, “PEI”], a general contractor from Vienna, Virginia and appellant in this action, prepared a bid for the NIH work. In preparing its bid, PEI solicited sub-bids from various mechanical subcontractors. The A.S. Johnson Company [hereinafter, “Johnson”], a mechanical subcontractor located in Clinton, Maryland and the appellee here, responded with a written scope of work proposal on July 27, 1993. On the morning of August 5, 1993, the day NIH opened the general contractors’ bids, Johnson verbally submitted a quote of $898,000 for the HVAC component. Neither party disputes that PEI used Johnson’s sub-bid in computing its own bid. PEI submitted a bid of $1,585,000 for the entire project.

[3]    General contractors’ bids were opened on the afternoon of August 5, 1993. PEI’s bid was the second lowest bid. The government subsequently disqualified the apparent low bidder,
however, and in mid-August, NIH notified PEI that its bid would be accepted.

[4]    With the knowledge that PEI was the lowest responsive bidder, Thomas F. Pavel, president of PEI, visited the offices of A.S. Johnson on August 26, 1993, and met with James Kick, Johnson’s chief estimator, to discuss Johnson’s proposed role in the work. Pavel testified at trial to the purpose of the meeting:

I met with Mr. Kick. And the reason for me going to their office was to look at their offices, to see their facility, to basically sit down and talk with them, as I had not done, and my company had not performed business with them on a direct relationship, but we had heard of their reputation. I wanted to go out and see where their facility was, see where they were located, and basically just sit down and talk to them. Because if we were going to use them on a project, I wanted to know who I was dealing with.

Pavel also asked if Johnson would object to PEI subcontracting directly with Powers for electric controls, rather than the arrangement originally envisioned in which Powers would be Johnson’s subcontractor. Johnson did not object.

[5]    Following that meeting, PEI sent a fax to all of the mechanical subcontractors from whom it had received sub-bids on the NIH job. The text of that fax is reproduced:

Pavel Enterprises, Inc.




We herewith respectfully request that you review your bid on the above referenced project that was bid on 8/05/93. PEI has been notified that we will be awarded the project as J.J. Kirlin, Inc. [the original low bidder] has been found to be nonresponsive on the solicitation. We anticipate award on or around the first of September and therefor request that you supply the following information.

1. Please break out your cost for the “POWERS” supplied control work as we will be subcontracting directly to “POWERS”.

Please resubmit your quote deleting the above referenced item.

We ask this in an effort to allow all prospective bidders to compete on an even playing field.

Should you have any questions, please call us immediately as time is of the essence.

[6]    On August 30, 1993, PEI informed NIH that Johnson was to be the mechanical subcontractor on the job. On September 1, 1993, PEI mailed and faxed a letter to Johnson formally accepting Johnson’s bid. That letter read:

Pavel Enterprises, Inc.

September 1, 1993

Mr. James H. Kick, Estimating Mngr.

A.S. Johnson Company

8042 Old Alexandria Ferry Road

Clinton, Maryland 20735

Re: NIH Bldg 30 HVAC Modifications

RC: IFB # 263-93-B (CM)-0422

Subject: Letter of Intent to Award Subcontract

Dear Mr. Kick:

We herewith respectfully inform your office of our intent to award a subcontract for the above referenced project per your quote received on 8/05/93 in the amount of $898,000.00. This subcontract will be forwarded upon receipt of our contract from the NIH, which we expect any day. A preconstruction meeting is currently scheduled at the NIH on 9/08/93 at 10 AM which we have been requested that your firm attend.

As discussed with you, a meeting was held between NIH and PEI wherein PEI confirmed our bid to the government, and designated your firm as our HVAC Mechanical subcontractor. This action was taken after several telephonic and face to face discussions with you regarding the above referenced bid submitted by your firm.

We look forward to working with your firm on this contract and hope that this will lead to a long and mutually beneficial relationship

/s/ Thomas F. Pavel


[7]    Upon receipt of PEI’s fax of September 1, James Kick called and informed PEI that Johnson’s bid contained an error, and as a result the price was too low. According to Kick, Johnson had discovered the mistake earlier, but because Johnson believed that PEI had not been awarded the contract, they did not feel compelled to correct the error. Kick sought to withdraw Johnson’s bid, both over the telephone and by a letter dated September 2, 1993:

A.S. Johnson Co.

September 2, 1993

PEI Construction
780 West Maples Avenue, Suite 101
Vienna, Virginia 22180

Attention: Thomas Pavel, President

Reference: NIH Building 30 HVAC Modifications

Dear Mr. Pavel,

We respectfully inform you of our intention to withdraw our proposal for the above referenced project due to an error in our bid.

As discussed in our telephone conversation and face to face meeting, the management of A.S. Johnson Company was reviewing this proposal, upon which we were to confirm our pricing to you.

Please contact Mr. Harry Kick, General Manager at [telephone number deleted] for any questions you may have.

Very truly yours,

/s/ James H. Kick

Estimating Manager

[8]    PEI responded to both the September 1 phone call, and the September 2 letter, expressing its refusal to permit Johnson to withdraw.

[9]    On September 28, 1993, NIH formally awarded the construction contract to PEI. PEI found a substitute subcontractor to do the mechanical work, but at a cost of $930,000.
PEI brought suit against Johnson in the Circuit Court for Prince George’s County to recover the $32,000 difference between Johnson’s bid and the cost of the substitute mechanical subcontractor.

[10]    The case was heard by the trial court without the aid of a jury. The trial court made several findings of fact, which we summarize:

1. PEI relied upon Johnson’s sub-bid in making its bid for the entire project;

2. The fact that PEI was not the low bidder, but was awarded the project only after the apparent low bidder was disqualified, takes this case out of the ordinary;

3. Prior to NIH awarding PEI the contract on September 28, Johnson, on September 2, withdrew its bid; and

4. PEI’s letter to all potential mechanical subcontractors, dated August 26, 1993, indicates that there was no definite agreement between PEI and Johnson, and that PEI was not relying upon Johnson’s bid.

[11]    The trial court analyzed the case under both a traditional contract theory and under a detrimental reliance theory. PEI was unable to satisfy the trial judge that under either theory a contractual relationship had been formed.

[12]    PEI appealed to the Court of Special Appeals, raising both traditional offer and acceptance theory, and “promissory estoppel.” Before our intermediate appellate court considered the case, we issued a writ of certiorari on our own motion.


[13]    The relationships involved in construction contracts have long posed a unique problem in the law of contracts. A brief overview of the mechanics of the construction bid process, as well as our legal system’s attempts to regulate the process, is in order.


[14]    Our description of the bid process in Maryland Supreme Corp. v. Blake Co., 279 Md. 531, 369 A.2d 1017 (1977) is still accurate:

In such a building project there are basically three parties involved: the letting party, who calls for bids on its job; the general contractor, who makes a bid on the whole project; and the subcontractors, who bid only on that portion of the whole job which involves the field of its specialty. The usual procedure is that when a project is announced, a subcontractor, on his own initiative or at the general contractor’s request, prepares an estimate and submits a bid to one or more of the general contractors interested in the project. The general contractor evaluates the bids made by the subcontractors in each field and uses them to compute its total bid to the letting party. After receiving bids from general contractors, the letting party ordinarily awards the contract to the lowest reputable bidder.

Id. at 533-34, 369 A.2d at 1020-21 (citing [Franklin M. Schulz, The Firm Offer Puzzle: A Study of Business Practice in the Construction Industry, 19 U. Chi. L. Rev. 237 (1952)])


[15]    The problem the construction bidding process poses is the determination of the precise points on the timeline that the various parties become bound to each other. The early landmark case was James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344 (2d Cir.1933). The plaintiff, James Baird Co., [“Baird”] was a general contractor from Washington, D.C., bidding to construct a government building in Harrisburg, Pennsylvania. Gimbel Bros., Inc., [“Gimbel”], the famous New York department store, sent its bid to supply linoleum to a number of bidding general contractors on December 24, and Baird received Gimbel’s bid on December 28. Gimbel realized its bid was based on an incorrect computation and notified Baird of its withdrawal on December 28. The letting authority awarded Baird the job on December 30. Baird formally accepted the Gimbel bid on January 2. When Gimbel refused to perform, Baird sued for the additional cost of a substitute linoleum supplier. The Second Circuit Court of Appeals held that Gimbel’s initial bid was an offer to contract and, under traditional contract law, remained open only until accepted or withdrawn. Because the offer was withdrawn before it was accepted there was no contract. Judge Learned Hand, speaking for the court, also rejected two alternative theories of the case: unilateral contract and promissory estoppel. He held that Gimbel’s bid was not an offer of a unilateral contract that Baird could accept by performing, i.e., submitting the bid as part of the general bid; and second, he held that the theory of promissory estoppel was limited to cases involving charitable pledges.

[16]    Judge Hand’s opinion was widely criticized, see Note, Contracts-Promissory Estoppel, 20 Va. L. Rev. 214 (1933) [hereinafter, ” Promissory Estoppel “]; Note, Contracts-Revocation of Offer Before Acceptance-Promissory Estoppel, 28 Ill. L. Rev. 419 (1934), but also widely influential. The effect of the James Baird line of cases, however, is an “obvious injustice without relief of any description.” Promissory Estoppel, at 215. The general contractor is bound to the price submitted to the letting party, but the subcontractors are not bound, and are free to withdraw. As one commentator described it, “If the subcontractor revokes his bid before it is accepted by the general, any loss which results is a deduction from the general’s profit and conceivably may transform overnight a profitable contract into a losing deal.” Franklin M. Schultz, The Firm Offer Puzzle: A Study of Business Practice in the Construction Industry, 19 U. Chi. L. Rev. 237, 239 (1952).

[17]    The unfairness of this regime to the general contractor was addressed in Drennan v. Star Paving, 333 P.2d 757, 51 Cal.2d 409 (1958). Like James Baird, the Drennan case arose in the context of a bid mistake. Justice Traynor, writing for the Supreme Court of California, relied upon § 90 of the Restatement (First) of Contracts:

A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.

Restatement (First) of Contracts § 90 (1932).

[18]    Justice Traynor reasoned that the subcontractor’s bid contained an implied subsidiary promise not to revoke the bid. As the court stated:

When plaintiff[, a General Contractor,] used defendant’s offer in computing his own bid, he bound himself to perform in reliance on defendant’s terms. Though defendant did not bargain for the use of its bid neither did defendant make it idly, indifferent to whether it would be used or not. On the contrary it is reasonable to suppose that defendant submitted its bid to obtain the subcontract. It was bound to realize the substantial possibility that its bid would be the lowest, and that it would be included by plaintiff in his bid. It was to its own interest that the contractor be awarded the general contract; the lower the subcontract bid, the lower the general contractor’s bid was likely to be and the greater its chance of acceptance and hence the greater defendant’s chance of getting the paving subcontract. Defendant had reason not only to expect plaintiff to rely on its bid but to want him to. Clearly defendant had a stake in plaintiff’s reliance on its bid. Given this interest and the fact that plaintiff is bound by his own bid, it is only fair that plaintiff should have at least an opportunity to accept defendant’s bid after the general contract has been awarded to him.

Drennan, 51 Cal.2d at 415, 333 P.2d at 760.

[19]    The Drennan court however did not use “promissory estoppel” as a substitute for the entire contract, as is the doctrine’s usual function. Instead, the Drennan court, applying the principle of § 90, interpreted the subcontractor’s bid to be irrevocable. Justice Traynor’s analysis used promissory estoppel as consideration for an implied promise to keep the bid open for a reasonable time. Recovery was then predicated on traditional bilateral contract, with the sub-bid as the offer and promissory estoppel serving to replace acceptance.

[20]    The Drennan decision has been very influential. Many states have adopted the reasoning used by Justice Traynor. See, e.g., Debron Corp. v. National Homes Constr. Corp., 493 F.2d 352 (8th Cir.1974) (applying Missouri law); Reynolds v. Texarkana Constr. Co., 237 Ark. 583, 374 S.W.2d 818 (1964); Mead Assocs. Inc. v. Antonsen, 677 P.2d 434 (Colo.1984); Illinois Valley Asphalt v. J.F. Edwards Constr. Co., 45 Ill.Dec. 876, 413 N.E.2d 209, 90 Ill.App.3d 768 (Ill.Ct.App.1980); Lichtefeld-Massaro, Inc. v. R.J. Manteuffel Co., 806 S.W.2d 42 (Ky.App.1991); Constructors Supply Co. v. Bostrom Sheet Metal Works, Inc., 291 Minn. 113, 190 N.W.2d 71 (1971); E.A. Coronis Assocs. v. M. Gordon Constr. Co., 90 N.J. Super 69, 216 A.2d 246 (1966).

[21]    Despite the popularity of the Drennan reasoning, the case has subsequently come under some criticism.
The criticism centers on the lack of symmetry of detrimental reliance in the bid process, in that subcontractors are bound to the general, but the general is not bound to the subcontractors.
The result is that the general is free to bid shop,
bid chop,
and to encourage bid peddling,
to the detriment of the subcontractors. One commentator described the problems that these practices create:

Bid shopping and peddling have long been recognized as unethical by construction trade organizations. These ‘unethical,’ but common practices have several detrimental results. First, as bid shopping becomes common within a particular trade, the subcontractors will pad their initial bids in order to make further reductions during post-award negotiations. This artificial inflation of subcontractor’s offers makes the bid process less effective. Second, subcontractors who are forced into post-award negotiations with the general often must reduce their sub-bids in order to avoid losing the award. Thus, they will be faced with a Hobson’s choice between doing the job at a loss or doing a less than adequate job. Third, bid shopping and peddling tend to increase the risk of loss of the time and money used in preparing a bid. This occurs because generals and subcontractors who engage in these practices use, without expense, the bid estimates prepared by others. Fourth, it is often impossible for a general to obtain bids far enough in advance to have sufficient time to properly prepare his own bid because of the practice, common among many subcontractors, of holding sub-bids until the last possible moment in order to avoid pre-award bid shopping by the general. Fifth, many subcontractors refuse to submit bids for jobs on which they expect bid shopping. As a result, competition is reduced, and, consequently, construction prices are increased. Sixth, any price reductions gained through the use of post-award bid shopping by the general will be of no benefit to the awarding authority, to whom these price reductions would normally accrue as a result of open competition before the award of the prime contract. Free competition in an open market is therefore perverted because of the use of post-award bid shopping.

Bid Shopping, at 394-96 (citations omitted). See also Flag Pole, at 818 (bid mistake cases generally portray general contractor as victim, but market reality is that subs are usually in weaker negotiating position); Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678, 707-08 (1984). These problems have caused at least one court to reject promissory estoppel in the contractor-subcontractor relationship. Home Elec. Co. v. Underdown Heating & Air Conditioning Co., 86 N.C.App. 540, 358 S.E.2d 539 (1987). See also Note, Construction Contracts-The Problem of Offer and Acceptance in the General Contractor-Subcontractor Relationship, 37 U. Cinn. L. Rev. 798 (1980). But other courts, while aware of the limitations of promissory estoppel, have adopted it nonetheless. See, e.g., Alaska Bussell Elec. Co. v. Vern Hickel Constr. Co., 688 P.2d 576 (Alaska 1984).

[22]    The doctrine of detrimental reliance has evolved in the time since Drennan was decided in 1958. The American Law Institute, responding to Drennan, sought to make detrimental reliance more readily applicable to the construction bidding scenario by adding § 87. This new section was intended to make subcontractors’ bids binding:

§ 87. Option Contract

(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.”

Restatement (Second) of Contracts § 87 (1979).

[23]    Despite the drafter’s intention that § 87 of the Restatement (Second) of Contracts (1979) should replace Restatement (First) of Contracts § 90 (1932) in the construction bidding cases, few courts have availed themselves of the opportunity. But see, Arango Constr. Co. v. Success Roofing, Inc., 46 Wash.App. 314, 321-22, 730 P.2d 720, 725 (1986). Section 90(1) of the Restatement (Second) of Contracts (1979) modified the first restatement formulation in three ways, by: 1) deleting the requirement that the action of the offeree be “definite and substantial;” 2) adding a cause of action for third party reliance; and 3) limiting remedies to those required by justice.

[24]    Courts and commentators have also suggested other solutions intended to bind the parties without the use of detrimental reliance theory. The most prevalent suggestion
is the use of the firm offer provision of the Uniform Commercial Code. Maryland Code (1992 Repl.Vol.), § 2-205 of the Commercial Law Article. That statute provides:

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.

[25]    In this manner, subcontractor’s bids, made in writing and giving some assurance of an intent that the offer be held open, can be found to be irrevocable.

[26]    The Supreme Judicial Court of Massachusetts has suggested three other traditional theories that might prove the existence of a contractual relationship between a general contractor and a sub: conditional bilateral contract analysis; unilateral contract analysis; and unrevoked offer analysis. Loranger Constr. Corp. v. E.F. Hauserman Co., 384 N.E.2d 176, 376 Mass. 757 (1978). If the general contractor could prove that there was an exchange of promises binding the parties to each other, and that exchange of promises was made before bid opening, that would constitute a valid bilateral promise conditional upon the general being awarded the job. Loranger, 384 N.E.2d at 180, 376 Mass. at 762. This directly contrasts with Judge Hand’s analysis in James Baird, that a general’s use of a sub-bid constitutes acceptance conditional upon the award of the contract to the general. James Baird, 64 F.2d at 345-46.

[27]    Alternatively, if the subcontractor intended its sub-bid as an offer to a unilateral contract, use of the sub-bid in the general’s bid constitutes part performance, which renders the initial offer irrevocable under the Restatement (Second) of Contracts § 45 (1979). Loranger, 384 N.E.2d at 180, 376 Mass. at 762. This resurrects a second theory dismissed by Judge Learned Hand in James Baird.

[28]    Finally, the Loranger court pointed out that a jury might choose to disbelieve that a subcontractor had withdrawn the winning bid, meaning that acceptance came before withdrawal, and a traditional bilateral contract was formed. Loranger, 384 N.E.2d at 180, 376 Mass. at 762-63.

[29]    Another alternative solution to the construction bidding problem is no longer seriously considered-revitalizing the common law seal. William Noel Keyes, Consideration Reconsidered—The Problem of the Withdrawn Bid, 10 Stan. L. Rev. 441, 470 (1958). Because a sealed option contract remains firm without consideration this alternative was proposed as a solution to the construction bidding problem.


[30]    If PEI is able to prove by any of the theories described that a contractual relationship existed, but Johnson failed to perform its end of the bargain, then PEI will recover the $32,000 in damages caused by Johnson’s breach of contract. Alternatively, if PEI is unable to prove the existence of a contractual relationship, then Johnson has no obligation to PEI. We will test the facts of the case against the theories described to determine if such a relationship existed.

[31]    The trial court held, and we agree, that Johnson’s sub-bid was an offer to contract and that it was sufficiently clear and definite. We must then determine if PEI made a timely and valid acceptance of that offer and thus created a traditional bilateral contract, or in the absence of a valid acceptance, if PEI’s detrimental reliance served to bind Johnson to its sub-bid. We examine each of these alternatives, beginning with traditional contract theory.


[32]    The trial judge found that there was not a traditional contract binding Johnson to PEI. A review of the record and the trial judge’s findings make it clear that this was a close question. On appeal however, our job is to assure that the trial judge’s findings were not clearly erroneous. Maryland Rule 8-131(c). This is an easier task.

[33]    The trial judge rejected PEI’s claim of bilateral contract for two separate reasons: 1) that there was no meeting of the minds; and 2) that the offer was withdrawn prior to acceptance. Both need not be proper bases for decision; if either of these two theories is not clearly erroneous, we must affirm.

[34]    There is substantial evidence in the record to support the judge’s conclusion that there was no meeting of the minds. PEI’s letter of August 26, to all potential mechanical subcontractors, reproduced supra [¶ 5], indicates, as the trial judge found, that PEI and Johnson “did not have a definite, certain meeting of the minds on a certain price for a certain quantity of goods….” Because this reason is itself sufficient to sustain the trial judge’s finding that no contract was formed, we affirm.

[35]    Alternatively, we hold, that the evidence permitted the trial judge to find that Johnson revoked its offer prior to PEI’s final acceptance. We review the relevant chronology. Johnson made its offer, in the form of a sub-bid, on August 5. On September 1, PEI accepted. Johnson withdrew its offer by letter dated September 2. On September 28, NIH awarded the contract to PEI. Thus, PEI’s apparent acceptance came one day prior to Johnson’s withdrawal.

[36]    The trial court found, however, “that before there was ever a final agreement reached with the contract awarding authorities, that Johnson made it clear to [PEI] that they were not going to continue to rely on their earlier submitted bid.” Implicit in this finding is the judge’s understanding of the contract. Johnson’s sub-bid constituted an offer of a contingent contract. PEI accepted that offer subject to the condition precedent of PEI’s receipt of the award of the contract from NIH. Prior to the occurrence of the condition precedent, Johnson was free to withdraw. See 2 Williston on Contracts § 6:14 (4th ed.). On September 2, Johnson exercised that right to revoke.
The trial judge’s finding that withdrawal proceeded valid final acceptance is therefore logical and supported by substantial evidence in the record. It was not clearly erroneous, so we shall affirm.


[37]    PEI’s alternative theory of the case is that PEI’s detrimental reliance binds Johnson to its bid. We are asked, as a threshold question, if detrimental reliance applies to the setting of construction bidding. Nothing in our previous cases suggests that the doctrine was intended to be limited to a specific factual setting. The benefits of binding subcontractors outweigh the possible detriments of the doctrine.

[38]    This Court has decided cases based on detrimental reliance as early as 1854,
and the general contours of the doctrine are well understood by Maryland courts. The historical development of promissory estoppel, or detrimental reliance, in Maryland has mirrored the development nationwide. It was originally a small exception to the general consideration requirement, and found in “cases dealing with such narrow problems as gratuitous agencies and bailments, waivers, and promises of marriage settlement.” Jay M. Feinman, Promissory Estoppel and Judicial Method, 97 Harv. L. Rev. 678, 680 (1984). The early Maryland cases applying “promissory estoppel” or detrimental reliance primarily involve charitable pledges.

[39]    The leading case is Maryland Nat’l Bank v. United Jewish Appeal Fed’n of Greater Washington, 286 Md. 274, 407 A.2d 1130 (1979), where this Court’s opinion was authored by the late Judge Charles E. Orth, Jr. In that case, a decedent, Milton Polinger, had pledged $200,000 to the United Jewish Appeal [“UJA”]. The UJA sued Polinger’s estate in an attempt to collect the money promised them. Judge Orth reviewed four prior decisions of this Court
and determined that Restatement (First) of Contracts § 90 (1932) applied. Id. at 281, 407 A.2d at 1134. Because the Court found that the UJA had not acted in a “definite or substantial” manner in reliance on the contribution, no contract was found to have been created. Id. at 289-90, 407 A.2d at 1138-39.

[40]    Detrimental reliance doctrine has had a slow evolution from its origins in disputes over charitable pledges, and there remains some uncertainty about its exact dimensions.
Two cases from the Court of Special Appeals demonstrate that confusion.

[41]    The first, Snyder v. Snyder, 79 Md.App. 448, 558 A.2d 412 (1989), arose in the context of a suit to enforce an antenuptial agreement. To avoid the statute of frauds, refuge was sought in the doctrine of “promissory estoppel.” The court held that “promissory estoppel” requires a finding of fraudulent conduct on the part of the promisor. See also Friedman & Fuller v. Funkhouser, 107 Md.App. 91, 666 A.2d 1298 (1995).

[42]    The second, Kiley v. First Nat’l Bank, 102 Md.App. 317, 649 A.2d 1145 (1994), the court stated that “[i]t is unclear whether Maryland continues to adhere to the more stringent formulation of promissory estoppel, as set forth in the original Restatement of Contracts, or now follows the more flexible view found in the Restatement (Second) Contracts.Id. at 336, 649 A.2d at 1154.

[43]    To resolve these confusions we now clarify that Maryland courts are to apply the test of the Restatement (Second) of Contracts § 90(1) (1979), which we have recast as a four-part test:

1. a clear and definite promise;

2. where the promisor has a reasonable expectation that the offer will induce action or forbearance on the part of the promisee;

3. which does induce actual and reasonable action or forbearance by the promisee; and

4. causes a detriment which can only be avoided by the enforcement of the promise.

[44]    We have adopted language of the Restatement (Second) of Contracts (1979) because we believe each of the three changes made to the previous formulation were for the better. As discussed earlier, the first change was to delete the requirement that the action of the offeree be “definite and substantial.” Although the Court of Special Appeals in Kiley v. First Nat’l Bank, 102 Md.App. 317, 336, 649 A.2d 1145, 1154 (1994) apparently presumed this to be a major change from the “stringent” first restatement to the “more flexible” second restatement, we perceive the language to have always been redundant. If the reliance is not “substantial and definite” justice will not compel enforcement.

[45]    The decisions in Snyder v. Snyder, 79 Md.App. 448, 558 A.2d 412 (1989) and Friedman & Fuller v. Funkhouser, 107 Md.App. 91, 666 A.2d 1298 (1995) to the extent that they required a showing of fraud on the part of the offeree are therefore disapproved.

[46]    In a construction bidding case, where the general contractor seeks to bind the subcontractor to the sub-bid offered, the general must first prove that the subcontractor’s sub-bid constituted an offer to perform a job at a given price. We do not express a judgment about how precise a bid must be to constitute an offer, or to what degree a general contractor may request to change the offered scope before an acceptance becomes a counter-offer. That fact-specific judgment is best reached on a case-by-case basis. In the instant case, the trial judge found that the sub-bid was sufficiently clear and definite to constitute an offer, and his finding was not clearly erroneous.

[47]    Second, the general must prove that the subcontractor reasonably expected that the general contractor would rely upon the offer. The subcontractor’s expectation that the general contractor will rely upon the sub-bid may dissipate through time.

[48]    In this case, the trial court correctly inquired into Johnson’s belief that the bid remained open, and that consequently PEI was not relying on the Johnson bid. The judge found that due to the time lapse between bid opening and award, “it would be unreasonable for offers to continue.” This is supported by the substantial evidence. James Kick testified that although he knew of his bid mistake, he did not bother to notify PEI because J.J. Kirlin, Inc., and not PEI, was the apparent low bidder. The trial court’s finding that Johnson’s reasonable expectation had dissipated in the span of a month is not clearly erroneous.

[49]    As to the third element, a general contractor must prove that he actually and reasonably relied on the subcontractor’s sub-bid. We decline to provide a checklist of potential methods of proving this reliance, but we will make several observations. First, a showing by the subcontractor, that the general contractor engaged in “bid shopping,” or actively encouraged “bid chopping,” or “bid peddling” is strong evidence that the general did not rely on the sub-bid. Second, prompt notice by the general contractor to the subcontractor that the general intends to use the sub on the job, is weighty evidence that the general did rely on the bid.Third, if a sub-bid is so low that a reasonably prudent general contractor would not rely upon it, the trier of fact may infer that the general contractor did not in fact rely upon the erroneous bid.

[50]    In this case, the trial judge did not make a specific finding that PEI failed to prove its reasonable reliance upon Johnson’s sub-bid. We must assume, however, that it was his conclusion based on his statement that “the parties did not have a definite, certain meeting of the minds on a certain price for a certain quantity of goods and wanted to renegotiate….” The August 26, 1993, fax from PEI to all prospective mechanical subcontractors, is evidence supporting this conclusion. Although the finding that PEI did not rely on Johnson’s bid was indisputably a close call, it was not clearly erroneous.

[51]    Finally, as to the fourth prima facie element, the trial court, and not a jury, must determine that binding the subcontractor is necessary to prevent injustice. This element is to be enforced as required by common law equity courts—the general contractor must have “clean hands.” This requirement includes, as did the previous element, that the general did not engage in bid shopping, chopping or peddling, but also requires the further determination that justice compels the result. The fourth factor was not specifically mentioned by the trial judge, but we may infer that he did not find this case to merit an equitable remedy.

[52]    Because there was sufficient evidence in the record to support the trial judge’s conclusion that PEI had not proven its case for detrimental reliance, we must, and hereby do, affirm the trial court’s ruling.


[53]    In conclusion, we emphasize that there are different ways to prove that a contractual relationship exists between a general contractor and its subcontractors. Traditional bilateral contract theory is one. Detrimental reliance can be another. However, under the evidence in this case, the trial judge was not clearly erroneous in deciding that recovery by the general contractor was not justified under either theory.



3.2.1 Discussion of Pavel Enterprises

In Pavel Enterprises, the court refers to two seminal cases (Baird and Drennan) that take diametrically opposed views of the rules governing the enforcement of construction bids. Under the comparatively restrictive approach of Baird, how could the general contractor have secured an irrevocable offer for the linoleum?

How does Drennan allow parties to accomplish the same objective without requiring any additional steps?

Can you apply a hypothetical bargain analysis to the problems that commonly arise in construction bidding? Does that analysis justify constraining subcontractors who wish to disavow their bids? What limitations, if any, should we impose on the rights that these rules confer on general contractors?

3.3 The Mirror Image Rule

Recall from our discussion of Restatement (Second) § 36 that an offeree loses the power of acceptance when she rejects an offer or makes a counter-offer. The following case involves an application of this rule.


3.4 Principal Case – Dataserv Equipment, Inc. v. Technology Finance Leasing

Dataserv Equipment, Inc. v. Technology Finance Leasing Corp.

Court of Appeals of Minnesota

364 N.W.2d 838 (1985)

Wozniak, Judge.

[1]    This is an appeal from a judgment entered after trial to the district court determining that appellant was subject to the jurisdiction of Minnesota courts and that appellant breached a contract to purchase certain computer equipment. We … reverse on the question of contract formation.


[2]    Appellant Technology Finance Group, Inc. (Technology), a Nevada corporation with its principal place of business in Connecticut, and Respondent Dataserv Equipment, Inc. (Dataserv), a Minnesota corporation with its principal place of business in Minneapolis, are dealers in new and used computer equipment.

[3]    On or about August 29, 1979, Dataserv’s Jack Skjonsby telephoned Technology’s Ron Finerty in Connecticut and proposed to sell to Technology, for the price of $100,000, certain IBM computer “features” which Dataserv had previously purchased in Canada.

[4]    As a result of long distance telephone conversations between Skjonsby and Finerty, on August 30, 1979, Finerty sent Skjonsby a written offer to purchase the features and on September 6, 1979, Dataserv sent to Technology a proposed form of contract. Dataserv’s proposed contract form included a nonstandard provision, appearing in the contract form as clause 8 and referred to by the parties as the “Indepth Clause.” The clause provided that installation of the features would be done by Indepth, a third party. The contract also provided that “[t]his agreement is subject to acceptance by the seller … and shall only become effective on the date thereof,” and “[t]his agreement is made subject to the terms and conditions included herein and Purchaser’s acceptance is effective only to the extent that such terms and conditions are conditions herein. Any acceptance which contains conditions which are in addition to or inconsistent with the terms and conditions herein will be a counter offer and will not be binding unless agreed to in writing by the Seller.”

[5]    On October 1, Finerty wrote Skjonsby that three changes “need to be made” in the contract, one of which was the deletion of clause 8. The letter closed with: “Let me know and I will make the changes and sign.” Two of the changes were thereafter resolved, but the resolution of clause 8 remained in controversy.

[6]    Later in October 1979, Dataserv offered to accept, in substitution for Indepth, any other third-party installation company Technology would designate. Technology never agreed to this.

[7]    On November 8, 1979, Dataserv by telephone offered to remove the Indepth clause from the contract form. Technology responded that it was “too late,” and that there was no deal.

[8]    On November 9, 1979, Finerty called Dataserv, and informed them that “the deal was not going to get done because they’d waited until too late a point in time.” During this period of time, the market value of the features was dropping rapidly and Dataserv was anxious to complete the deal. It is undisputed that the market for used computer equipment, including its features, is downwardly price volatile.

[9]    By telex dated November 12, 1979, Dataserv informed Technology that the features were ready for pickup and that the pickup and payment be no later than November 15, 1979.

[10]    On November 13, 1979, Finerty responded by telex stating:

[S]ince [Dataserv] had not responded in a positive fashion to Alanthus’ [Alanthus is the former name of Technology Finance Group] letter requesting contract changes…its offer to purchase [the features] was withdrawn on 11/9/79 via telephone conversation with Jack Skjonsby. Ten to fifteen days prior, I made Jack aware that this deal was dead if Dataserv did not agree to contract changes prior to the “Eleventh Hour.”

[11]    On June 19, 1980, the features were sold by Dataserv to another party for $26,000. It then sought a judgment against Technology for the difference between the sale price of the features and the contract price.

[12]    By its Answer and by way of pretrial motion, Technology claimed that the court lacked jurisdiction over the person of the defendant. The trial court denied the motion on February 20, 1981.

[13]    At trial the parties stipulated that as of November 8, 1979 Dataserv telephonically offered to take out the Indepth Clause. The trial court found that this telephone call operated as an acceptance of Technology’s counteroffer of October 1, 1979, thereby establishing a contract between the parties embodying the terms of Dataserv’s printed standard contract dated September 6, 1979, minus clause 8 thereof. The trial court found that as of November 15, 1979, Technology breached its contract to Dataserv’s damage, and awarded Dataserv $74,000 in damages, plus interest from the date of the breach.



[14]    Technology claims that the trial court erred in finding that the parties entered into a contract. It contends that Dataserv’s response to its counteroffer operated, as a matter of law, as a rejection, terminating Dataserv’s power to subsequently accept the counteroffer.

[15]    Under familiar principles of contract law, a party’s rejection terminates its power of acceptance. Restatement (Second) of Contracts § 38 (1981). Once rejected, an offer is terminated and cannot subsequently be accepted without ratification by the other party. Nodland v. Chirpich, 240 N.W.2d 513, 307 Minn. 360 (1976).

[16]    The critical issue is whether Dataserv rejected Technology’s October 1 counteroffer. Dataserv responded to Technology’s October 1 counteroffer by agreeing to delete two of the three objectionable clauses, but insisting that the third be included. By refusing to accept according to the terms of the proposal, Dataserv rejected Technology’s counteroffer and thus no contract was formed. Moreover, Dataserv’s offer to substitute other third party installation companies, which Technology rejected, operated as a termination of its power to accept Technology’s counteroffer. Dataserv’s so-called “acceptance,” when it offered to delete clause 8 on November 8, 1979, was without any legal effect whatsoever, except to create a new offer which Technology immediately rejected.

[17]    Dataserv’s November 8 “acceptance” was also ineffective because it was not signed in accordance with the offer’s conditions. While it is true that Minn.Stat. §336.2-204 does not require a signed agreement prior to formation of a contract, where the parties know that the execution of a written contract was a condition precedent to their being bound, there can be no binding contract until the written agreement was executed. Staley Manufacturing Co. v. Northern Cooperatives, Inc., 168 F.2d 892 (8th Cir.1948).

[18]    Having found that no contract was formed between the parties, it is unnecessary to address the question of mitigation of damages.


[19]    Technology was subject to the jurisdiction of Minnesota courts. No contract was formed between the parties.

Affirmed in part, reversed in part.


3.4.1 The Mirror Image Rule and the Last Shot Doctrine

Parties often negotiate by exchanging written or oral proposals that they hope will culminate in a binding contractual agreement. In many negotiations, these proposals take the form of offers and counter-offers. As we have seen, an offer gives an offeree the power to form a contract by assenting to the proposed bargain. Thus, when Leslie offers to sell Josh her 2006 Acura TL for $25,000, Josh can either accept her offer and form a binding contract or reject it and continue negotiating for a better deal. In these situations, the legal consequences of Josh’s response are clear.

But what happens if the offeree’s response cannot be so easily classified? Suppose that Josh replies with enthusiastic assent to the bargain but, at the same time, indicates that he expects the deal to include the stylish fleece seat covers and portable GPS unit with which Leslie has equipped her car. As we will shortly learn, the Uniform Commercial Code provision that applies to this sale (recall that a car is unquestionably a “good” within the meaning of the UCC) departs significantly from the traditional common law approach to this situation. Nevertheless, it is instructive to consider how the common law rules would treat this interaction.

Under the so-called “mirror image rule,” an acceptance must manifest assent to all and only the precise terms of the offer. A purported acceptance like Josh’s that proposes different or additional terms would be treated as a counter-offer. The offeree may not add conditions or limitations to his acceptance, and any attempt to vary the terms of the original offer is equivalent to a rejection of that offer. Thus, Josh’s response would terminate his power of acceptance and give rise to a new offer that Leslie may accept or reject as she wishes. Only if the parties agreed to keep the original offer open, for example, by creating an option contract, would Josh retain the ability to form a contract by accepting Leslie’s original offer.

Suppose now that Airport Motors and Wheels for Less are negotiating a similar deal by mail. Airport Motors sends Wheels for Less a letter containing the initial offer described above along with terms specifying that the vehicle is being sold “as is” with no warranty of any kind. In reply, Wheels for Less writes to accept and requests delivery within one week, but the acceptance letter also includes the company’s standard “Terms of Sale” providing for a 90-day warranty against any defects in the engine or transmission. Airport Motors responds the next day with a “Confirmation of Sale” form that describes the vehicle and reiterates the company’s disclaimer of any warranties. Several days later, Airport Motors delivers the Acura and Wheels for Less accepts the delivery. During a test drive the next week, the engine’s head gasket cracks. Wheels for Less seeks to enforce the terms of the warranty contained in the company’s acceptance.

The mirror image rule implies that both the second and third communications were counter-offers that rejected the preceding offers. So do the parties have a contract, and if so, what are its terms? Under the so-called “last shot doctrine,” a court applying traditional common law principles would hold that by accepting delivery of the car and remaining silent in the face of the “Confirmation of Sale,” Wheels for Less accepted the terms of Airport Motors’ final counter-offer. The idea is that the “Confirmation of Sale” was the “last shot fired” between the parties during their negotiations. Now that their conduct demonstrates the existence of a contract, the common law uses a rather formal and mechanical rule to determine whose terms prevail. In our case, there is no enforceable warranty and this buyer would be out of luck.

Bear in mind, however, that the Uniform Commercial Code governs this transaction involving the sale of goods. As we will see in the next section, UCC § 2207 produces exactly the opposite result on the facts we have been considering.

3.4.2 Discussion of Dataserv Equipment, Inc. v. Technology Finance Leasing Corp.

What is it about Dataserv’s response to Technology’s offer that causes the court to rule that there is no contract?

Supposing for a moment that the parties in Dataserv Equipment had gone on to perform. Can you see how the “last shot doctrine” has the potential to produce formalistic and arbitrary results?

4. UCC Section 2-207

Recall our analysis of the hypothetical car sale negotiation between Airport Motors and Wheels for Less. As you read the next principal case, try to identify the provision of UCC § 2-207 that could give Wheels for Less a chance to obtain the warranty protection that it seeks.


4.1 Principal Case – Ionics v. Elmwood Sensors, Inc.

Ionics, Inc. v. Elmwood Sensors, Inc.

United States Court of Appeals for the First Circuit

110 F.3d 184 (1997)

Torruella, Chief Judge.

[1]    Ionics, Inc. (“Ionics”) purchased thermostats from Elmwood Sensors, Inc. (“Elmwood”) for installation in water dispensers manufactured by the former. Several of the dispensers subsequently caused fires which allegedly resulted from defects in the sensors. Ionics filed suit against Elmwood in order to recover costs incurred in the wake of the fires. Before trial, the district court denied Elmwood’s motion for partial summary judgment. The District Court of Massachusetts subsequently certified to this court “the question whether, in the circumstances of this case, § 2-207 of M.G.L. c. 106 has been properly applied.”

I. Standard of Review

[2]    We review the grant or denial of summary judgment de novo. See Borschow Hosp. & Medical Supplies v. Cesar Castillo, Inc., 96 F.3d 10, 14 (1st Cir.1996).

II. Background

[3]    The facts of the case are not in dispute. Elmwood manufactures and sells thermostats. Ionics makes hot and cold water dispensers, which it leases to its customers. On three separate occasions, Ionics purchased thermostats from Elmwood for use in its water dispensers. Every time Ionics made a purchase of thermostats from Elmwood, it sent the latter a purchase order form which contained, in small type, various “conditions.” Of the 20 conditions on the order form, two are of particular relevance:

18. REMEDIES – The remedies provided Buyer herein shall be cumulative, and in addition to any other remedies provided by law or equity. A waiver of a breach of any provision hereof shall not constitute a waiver of any other breach. The laws of the state shown in Buyer’s address printed on the masthead of this order shall apply in the construction hereof.

19. ACCEPTANCE – Acceptance by the Seller of this order shall be upon the terms and conditions set forth in items 1 to 17 inclusive, and elsewhere in this order. Said order can be so accepted only on the exact terms herein and set forth. No terms which are in any manner additional to or different from those herein set forth shall become a part of, alter or in any way control the terms and conditions herein set forth.

[4]    Near the time when Ionics placed its first order, it sent Elmwood a letter that it sends to all of its new suppliers. The letter states, in part:

The information preprinted, written and/or typed on our purchase order is especially important to us. Should you take exception to this information, please clearly express any reservations to us in writing. If you do not, we will assume that you have agreed to the specified terms and that you will fulfill your obligations according to our purchase order. If necessary, we will change your invoice and pay your invoice according to our purchase order.

[5]    Following receipt of each order, Elmwood prepared and sent an “Acknowledgment” form containing the following language in small type:


[6]    Although this passage refers to a “counteroffer,” we wish to emphasize that this language is not controlling. The form on which the language appears is labeled an “Acknowledgment” and the language comes under a heading that reads “Notice of Receipt of Order.” The form, taken as a whole, appears to contemplate an order’s confirmation rather than an order’s rejection in the form of a counteroffer.

[7]    It is undisputed that the Acknowledgment was received prior to the arrival of the shipment of goods. Although the district court, in its ruling on the summary judgment motion, states that “with each shipment of thermostats, Elmwood included an Acknowledgment Form,” this statement cannot reasonably be taken as a finding in support of the claim that the Acknowledgment and the shipment arrived together. First, in its certification order, the court states that “[t]he purchaser, after receiving the Acknowledgment, accepted delivery of the goods without objection.” This language is clearer and more precise than the previous statement and suggests that the former was simply a poor choice of phrasing. Furthermore, Ionics has not disputed the arrival time of the Acknowledgment. In its Memorandum in Support of Defendant’s Motion for Partial Summary Judgment Elmwood stated, under the heading of “Statements of Undisputed Facts,” that “for each of the three orders, Ionics received the Acknowledgment prior to receiving the shipment of thermostats.” In its own memorandum, Ionics argued that there existed disputed issues of material fact, but did not contradict Elmwood’s claim regarding the arrival of the Acknowledgment Form. Furthermore, in its appellate brief, Ionics does not argue that the time of arrival of the Acknowledgment Form is in dispute. Ionics repeats language from the district court’s summary judgment ruling that “with each shipment of thermostats, Elmwood included an Acknowledgment Form,” but does not argue that the issue is in dispute or confront the language in Elmwood’s brief which states that “[i]t is undisputed that for each of the three orders, Ionics received the Acknowledgment prior to receiving the shipment of thermostats.”

[8]    As we have noted, the Acknowledgment Form expressed Elmwood’s willingness to sell thermostats on “terms and conditions” that the Form indicated were listed on the reverse side. Among the terms and conditions listed on the back was the following:


[9]    Neither party disputes that they entered into a valid contract and neither disputes the quantity of thermostats purchased, the price paid, or the manner and time of delivery. The only issue in dispute is the extent of Elmwood’s liability.

[10]    In summary, Ionics’ order included language stating that the contract would be governed exclusively by the terms included on the purchase order and that all remedies available under state law would be available to Ionics. In a subsequent letter, Ionics added that Elmwood must indicate any objections to these conditions in writing. Elmwood, in turn, sent Ionics an Acknowledgment stating that the contract was governed exclusively by the terms in the Acknowledgment, and Ionics was given ten days to reject this “counteroffer.” Among the terms included in the Acknowledgment is a limitation on Elmwood’s liability. As the district court stated, “the terms are diametrically opposed to each other on the issue of whether all warranties implied by law were reserved or waived.”

[11]    We face, therefore, a battle of the forms. This is purely a question of law. The dispute turns on whether the contract is governed by the language after the comma in § 2-207(1) of the Uniform Commercial Code, according to the rule laid down by this court in Roto-Lith, Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir.1962), or whether it is governed by subsection (3) of the Code provision, as enacted by both Massachusetts, Mass. Gen. L. ch. 106, § 2-207 (1990 and 1996 Supp.), and Rhode Island, R.I. Gen. Laws § 6A-2-207 (1992). We find the rule of Roto-Lith to be in conflict with the purposes of section 2-207 and, accordingly, we overrule Roto-Lith and find that subsection (3) governs the contract. Analyzing the case under section 2-207, we conclude that Ionics defeats Elmwood’s motion for partial summary judgment.

III. Legal Analysis

[12]    Our analysis begins with the statute. Section 2-207 reads as follows:

§ 2-207. Additional Terms in Acceptance or Confirmation

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional or different terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter.

Mass. Gen. L. ch. 106, § 2-207 (1990 and 1996 Supp.).

[13]    In Roto-Lith, Roto-Lith sent a purchase order to Bartlett, who responded with an acknowledgment that included language purporting to limit Bartlett’s liability. Roto-Lith did not object. Roto-Lith, 297 F.2d at 498-99. This court held that “a response which states a condition materially altering the obligation solely to the disadvantage of the offeror is an ‘acceptance…expressly…conditional on assent to the additional…terms.’ ” Id. at 500. This holding took the case outside of section 2-207 by applying the exception after the comma in subsection (1). The court then reverted to common law and concluded that Roto-Lith “accepted the goods with knowledge of the conditions specified in the acknowledgment [and thereby] became bound.” Id. at 500. In other words, the Roto-Lith court concluded that the defendant’s acceptance was conditional on assent, by the buyer, to the new terms and, therefore, constituted a counter offer rather than an acceptance. When Roto-Lith accepted the goods with knowledge of Bartlett’s conditions, it accepted the counteroffer and Bartlett’s terms governed the contract. Elmwood argues that Roto-Lith governs the instant appeal, implying that the terms of Elmwood’s acknowledgment govern.

[14]    Ionics claims that the instant case is distinguishable because in Roto-Lith “the seller’s language limiting warranties implied at law was proposed as an addition to, but was not in conflict with, the explicit terms of the buyer’s form. [In the instant case] the explicit terms of the parties’ forms conflict with and reject each other.” Appellee’s Brief at 21.

[15]    We do not believe that Ionics’ position sufficiently distinguishes Roto-Lith. It would be artificial to enforce language that conflicts with background legal rules while refusing to enforce language that conflicts with the express terms of the contract. Every contract is assumed to incorporate the existing legal norms that are in place. It is not required that every contract explicitly spell out the governing law of the jurisdiction. Allowing later forms to govern with respect to deviations from the background rules but not deviations from the terms in the contract would imply that only the terms in the contract could be relied upon. Aside from being an artificial and arbitrary distinction, such a standard would, no doubt, lead parties to include more of the background rules in their initial forms, making forms longer and more complicated. Longer forms would be more difficult and time consuming to read-implying that even fewer forms would be read than under the existing rules. It is the failure of firms to read their forms that has brought this case before us, and we do not wish to engender more of this type of litigation.

[16]    Our inquiry, however, is not complete. Having found that we cannot distinguish this case from Roto-Lith, we turn to the Uniform Commercial Code, quoted above. A plain language reading of section 2-207 suggests that subsection (3) governs the instant case. Ionics sent an initial offer to which Elmwood responded with its “Acknowledgment.” Thereafter, the conduct of the parties established the existence of a contract as required by section 2-207(3).

[17]    Furthermore, the case before us is squarely addressed in comment 6, which states:

6. If no answer is received within a reasonable time after additional terms are proposed, it is both fair and commercially sound to assume that their inclusion has been assented to. Where clauses on confirming forms sent by both parties conflict, each party must be assumed to object to a clause of the other conflicting with one on the confirmation sent by himself. As a result, the requirement that there be notice of objection which is found in subsection (2) [of § 2-207] is satisfied and the conflicting terms do not become part of the contract. The contract then consists of the terms originally expressly agreed to, terms on which the confirmations agree, and terms supplied by this Act.

Mass. Gen. L. ch. 106, § 2-207, Uniform Commercial Code Comment 6. This Comment addresses precisely the facts of the instant case. Any attempt at distinguishing the case before us from section 2-207 strikes us as disingenuous.

[18]    We are faced, therefore, with a contradiction between a clear precedent of this court, Roto-Lith, which suggests that the language after the comma in subsection (1) governs, and the clear dictates of the Uniform Commercial Code, which indicate that subsection (3) governs. It is our view that the two cannot coexist and the case at bar offers a graphic illustration of the conflict. We have, therefore, no choice but to overrule our previous decision in Roto-Lith, Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir.1962). Our decision brings this circuit in line with the majority view on the subject and puts to rest a case that has provoked considerable criticism from courts and commentators and alike.

[19]    We hold, consistent with section 2-207 and Official Comment 6, that where the terms in two forms are contradictory, each party is assumed to object to the other party’s conflicting clause. As a result, mere acceptance of the goods by the buyer is insufficient to infer consent to the seller’s terms under the language of subsection (1). Nor do such terms become part of the contract under subsection (2) because notification of objection has been given by the conflicting forms. See § 2-207(2)(c).

[20]    The alternative result, advocated by Elmwood and consistent with Roto-Lith, would undermine the role of section 2-207. Elmwood suggests that “a seller’s expressly conditional acknowledgment constitutes a counteroffer where it materially alters the terms proposed by the buyer, and the seller’s terms govern the contract between the parties when the buyer accepts and pays for the goods.” Appellant’s Brief at 12. Under this view, section 2-207 would no longer apply to cases in which forms have been exchanged and subsequent disputes reveal that the forms are contradictory. That is, the last form would always govern.

[21]    The purpose of section 2-207, as stated in Roto-Lith, “was to modify the strict principle that a response not precisely in accordance with the offer was a rejection and a counteroffer.” Roto-Lith, 297 F.2d at 500; see also Dorton v. Collins & Aikman Corp., 453 F.2d 1161, 1165-66 (6th Cir.1972) (stating that section 2-207 “was intended to alter the ‘ribbon-matching’ or ‘mirror’ rule of common law, under which the terms of an acceptance or confirmation were required to be identical to the terms of the offer”). Under the holding advocated by Elmwood, virtually any response that added to or altered the terms of the offer would be a rejection and a counteroffer. We do not think that such a result is consistent with the intent of section 2-207 and we believe it to be expressly contradicted by Comment 6.

[22]    Applied to this case, our holding leads to the conclusion that the contract is governed by section 2-207(3). Section 2-207(1) is inapplicable because Elmwood’s acknowledgment is conditional on assent to the additional terms. The additional terms do not become a part of the contract under section 2-207(2) because notification of objection to conflicting terms was given on the order form and because the new terms materially alter those in the offer. Finally, the conduct of the parties demonstrates the existence of a contract, as required by section 2-207(3). Thus, section 2-207(3) applies and the terms of the contract are to be determined in accordance with that subsection.

[23]    We conclude, therefore, that section 2-207(3) prevails and “the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this chapter.” Mass. Gen. L. ch. 106, § 2-207(3).

[24]    The reality of modern commercial dealings, as this case demonstrates, is that not all participants read their forms. See James J. White & Robert S. Summers, Uniform Commercial Code § 1-3 at 6-7 (4th ed.1995). To uphold Elmwood’s view would not only fly in the face of Official Comment 6 to section 2-207 of the Uniform Commercial Code, and the overall purpose of that section, it would also fly in the face of good sense. The sender of the last form (in the instant case, the seller) could insert virtually any conditions it chooses into the contract, including conditions contrary to those in the initial form. The final form, therefore, would give its sender the power to re-write the contract. Under our holding today, we at least ensure that a party will not be held to terms that are directly contrary to the terms it has included in its own form. Rather than assuming that a failure to object to the offeree’s conflicting terms indicates offeror’s assent to those terms, we shall make the more reasonable inference that each party continues to object to the other’s contradictory terms. We think it too much to grant the second form the power to contradict and override the terms in the first form.

IV. Conclusion

[25]    For the reasons stated herein, the district court’s order denying Elmwood’s motion for partial summary judgment is affirmed and the case is remanded to the district court for further proceedings.


4.1.1 The Text of U.C.C. § 2-207

Uniform Commercial Code § 2-207 is one of the most intricate and (arguably) poorly drafted provisions of the code. Here is the current version of the section. Students should also review Official Comments 1-7 from an outside source.

§ 2-207. Additional Terms in Acceptance or Confirmation

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this act.

4.1.2 Additional and Different Terms Under § 2-207

One of the (many) textual anomalies in § 2-207 is the fact that the first sentence of the section refers to “terms additional to or different from” the offer while the second sentence refers only to “[t]he additional terms.” What has happened to the “different” terms of the first sentence? More importantly, what should courts do when they confront forms containing not only “additional” but also “different” terms? The following excerpt from a Rhode Island case discusses several possible approaches to this question:

Courts have taken three divergent approaches to this question… . In brief the first approach treats “different” terms as a subgroup of “additional” terms. The result is that such different terms, when material, simply do not become part of the contract and thus the original delivery term offered [by offeror] would control. The second approach reaches the same result by concluding that “the offeror’s terms control because the offeree’s different terms merely fall out [of the contract]; § 2-207(2) cannot rescue the different terms since that subsection applies only to additional terms.” Finally, the third approach, aptly named the “knock-out rule,” holds that the conflicting terms cancel one another, leaving a blank in the contract with respect to the unagreed-upon term that would be filled with one of the UCC’s “gap-filler” provisions… .

After due consideration we conclude that both prudence and the weight of authority favor adoption of the knock-out rule as the law of this jurisdiction… . We conclude that this approach best promotes the UCC’s aim to abrogate the criticized common-law mirror image rule and its attendant last-shot doctrine and avoids “re-enshrin[ing] the undue advantages derived solely from the fortuitous positions of when a party sent a form.” Because of the UCC’s gap-filling provisions, we recognize that this approach might result in the enforcement of a contract term that neither party agreed to and, in fact, in regard to which each party expressed an entirely different preference. We note in response to this concern that the offeror and the offeree both have the power to protect any term they deem critical by expressly making acceptance conditional on assent to that term. And as merchants, both parties should have been well aware that their dealings were subject to the UCC and to its various gap-filling provisions.

Superior Boiler Works, Inc. v. R.J. Sanders, Inc., 711 A.2d 628 (R.I. 1998)

4.1.3 Discussion of Ionics v. Elmwood Sensors, Inc.

Ionics presents a comparatively simple application of § 2-207. How exactly do the provisions of that section apply to this case?

Can you identify the three main routes to a binding contract under § 2-207? How do they each differ from one another?

Finally, do you see the problem with applying § 2-207 to cases involving “different” terms? Which of the possible approaches to “different” terms would you favor?

5. Frontiers of Contract Formation

When parties negotiate face to face and memorialize their agreement in a signed writing, courts have little difficulty with the issue of contract formation. The previous sections have introduced a variety of complications. In each case, the parties’ communications were incomplete, contradictory, or inconclusive in some significant way. In this final section, we examine cases at the very frontier of traditional notions of contract formation. How should courts respond to so-called “shrink-wrap” or “click-wrap” licenses that purport to bind purchasers when they open a package or click through an online web purchase form? What should courts do to regulate the timing of contract formation? Are sellers free to structure transactions so that the contract is formed and its terms determined some days or weeks after delivery?

The next two principal cases address these and other questions. As you read, consider how both common law and UCC rules would apply to these facts. Think also about what rules you believe ought to apply to transactions like these.


5.1 Principal Case – Step-Saver Data Systems, Inc. v. Wyse Technology, Inc.

Step-Saver Data Systems, Inc. v. Wyse Technology, Inc.

United States Court of Appeals, Third Circuit

939 F.2d 91 (1991)

Wisdom, Circuit Judge

[1]    The “Limited Use License Agreement” printed on a package containing a copy of a computer program raises the central issue in this appeal. The trial judge held that the terms of the Limited Use License Agreement governed the purchase of the package, and, therefore, granted the software producer, The Software Link, Inc. (“TSL”), a directed verdict on claims of breach of warranty brought by a disgruntled purchaser, Step-Saver Data Systems, Inc. We disagree with the district court’s determination of the legal effect of the license, and reverse and remand the warranty claims for further consideration.

[2]    Step-Saver raises several other issues, but we do not find these issues warrant reversal. We, therefore, affirm in all other respects.


[3]    The growth in the variety of computer hardware and software has created a strong market for these products. It has also created a difficult choice for consumers, as they must somehow decide which of the many available products will best suit their needs. To assist consumers in this decision process, some companies will evaluate the needs of particular groups of potential computer users, compare those needs with the available technology, and develop a package of hardware and software to satisfy those needs. Beginning in 1981, Step-Saver performed this function as a value added retailer for International Business Machine (IBM) products. It would combine hardware and software to satisfy the word processing, data management, and communications needs for offices of physicians and lawyers. It originally marketed single computer systems, based primarily on the IBM personal computer.

[4]    As a result of advances in micro-computer technology, Step-Saver developed and marketed a multi-user system. With a multi-user system, only one computer is required. Terminals are attached, by cable, to the main computer. From these terminals, a user can access the programs available on the main computer.

[5]    After evaluating the available technology, Step-Saver selected a program by TSL, entitled Multilink Advanced, as the operating system for the multi-user system. Step-Saver selected WY-60 terminals manufactured by Wyse, and used an IBM AT as the main computer. For applications software, Step-Saver included in the package several off-the-shelf programs, designed to run under Microsoft’s Disk Operating System (“MS-DOS”), as well as several programs written by Step-Saver. Step-Saver began marketing the system in November of 1986, and sold one hundred forty-two systems mostly to law and medical offices before terminating sales of the system in March of 1987. Almost immediately upon installation of the system, Step-Saver began to receive complaints from some of its customers.

[6]    Step-Saver, in addition to conducting its own investigation of the problems, referred these complaints to Wyse and TSL, and requested technical assistance in resolving the problems. After several preliminary attempts to address the problems, the three companies were unable to reach a satisfactory solution, and disputes developed among the three concerning responsibility for the problems. As a result, the problems were never solved. At least twelve of Step-Saver’s customers filed suit against Step-Saver because of the problems with the multi-user system.

[7]    Once it became apparent that the three companies would not be able to resolve their dispute amicably, Step-Saver filed suit for declaratory judgment, seeking indemnity from either Wyse or TSL, or both, for any costs incurred by Step-Saver in defending and resolving the customers’ law suits. The district court dismissed this complaint, finding that the issue was not ripe for judicial resolution. We affirmed the dismissal on appeal. Step-Saver then filed a second complaint alleging breach of warranties by both TSL and Wyse and intentional misrepresentations by TSL. The district court’s actions during the resolution of this second complaint provide the foundation for this appeal.

[8]    On the first day of trial, the district court specifically agreed with the basic contention of TSL that the form language printed on each package containing the Multilink Advanced program (“the box-top license”) was the complete and exclusive agreement between Step-Saver and TSL under § 2-202 of the Uniform Commercial Code (UCC). Based on § 2-316 of the UCC, the district court held that the box-top license disclaimed all express and implied warranties otherwise made by TSL. The court therefore granted TSL’s motion in limine to exclude all evidence of the earlier oral and written express warranties allegedly made by TSL. After Step-Saver presented its case, the district court granted a directed verdict in favor of TSL on the intentional misrepresentation claim, holding the evidence insufficient as a matter of law to establish two of the five elements of a prima facie case: (1) fraudulent intent on the part of TSL in making the representations; and (2) reasonable reliance by Step-Saver. The trial judge requested briefing on several issues related to Step-Saver’s remaining express warranty claim against TSL. While TSL and Step-Saver prepared briefs on these issues, the trial court permitted Wyse to proceed with its defense. On the third day of Wyse’s defense, the trial judge, after considering the additional briefing by Step-Saver and TSL, directed a verdict in favor of TSL on Step-Saver’s remaining warranty claims, and dismissed TSL from the case.

[9]    The trial proceeded on Step-Saver’s breach of warranties claims against Wyse. At the conclusion of Wyse’s evidence, the district judge denied Step-Saver’s request for rebuttal testimony on the issue of the ordinary uses of the WY-60 terminal. The district court instructed the jury on the issues of express warranty and implied warranty of fitness for a particular purpose. Over Step-Saver’s objection, the district court found insufficient evidence to support a finding that Wyse had breached its implied warranty of merchantability, and refused to instruct the jury on such warranty. The jury returned a verdict in favor of Wyse on the two warranty issues submitted.

[10]    Step-Saver appeals on four points. (1) Step-Saver and TSL did not intend the box-top license to be a complete and final expression of the terms of their agreement. (2) There was sufficient evidence to support each element of Step-Saver’s contention that TSL was guilty of intentional misrepresentation. (3) There was sufficient evidence to submit Step-Saver’s implied warranty of merchantability claim against Wyse to the jury. (4) The trial court abused its discretion by excluding from the evidence a letter addressed to Step-Saver from Wyse, and by refusing to permit Step-Saver to introduce rebuttal testimony on the ordinary uses of the WY-60 terminal.


[11]    The relationship between Step-Saver and TSL began in the fall of 1984 when Step-Saver asked TSL for information on an early version of the Multilink program. TSL provided Step-Saver with a copy of the early program, known simply as Multilink, without charge to permit Step-Saver to test the program to see what it could accomplish. Step-Saver performed some tests with the early program, but did not market a system based on it.

[12]    In the summer of 1985, Step-Saver noticed some advertisements in Byte magazine for a more powerful version of the Multilink program, known as Multilink Advanced. Step-Saver requested information from TSL concerning this new version of the program, and allegedly was assured by sales representatives that the new version was compatible with ninety percent of the programs available “off-the-shelf” for computers using MS-DOS. The sales representatives allegedly made a number of additional specific representations of fact concerning the capabilities of the Multilink Advanced program.

[13]    Based on these representations, Step-Saver obtained several copies of the Multilink Advanced program in the spring of 1986, and conducted tests with the program. After these tests, Step-Saver decided to market a multi-user system which used the Multilink Advanced program. From August of 1986 through March of 1987, Step-Saver purchased and resold 142 copies of the Multilink Advanced program. Step-Saver would typically purchase copies of the program in the following manner. First, Step-Saver would telephone TSL and place an order. (Step-Saver would typically order twenty copies of the program at a time.) TSL would accept the order and promise, while on the telephone, to ship the goods promptly. After the telephone order, Step-Saver would send a purchase order, detailing the items to be purchased, their price, and shipping and payment terms. TSL would ship the order promptly, along with an invoice. The invoice would contain terms essentially identical with those on Step-Saver’s purchase order: price, quantity, and shipping and payment terms. No reference was made during the telephone calls, or on either the purchase orders or the invoices with regard to a disclaimer of any warranties.

[14]    Printed on the package of each copy of the program, however, would be a copy of the box-top license. The box-top license contains five terms relevant to this action:

(1) The box-top license provides that the customer has not purchased the software itself, but has merely obtained a personal, non-transferable license to use the program.

(2) The box-top license, in detail and at some length, disclaims all express and implied warranties except for a warranty that the disks contained in the box are free from defects.

(3) The box-top license provides that the sole remedy available to a purchaser of the program is to return a defective disk for replacement; the license excludes any liability for damages, direct or consequential, caused by the use of the program.

(4) The box-top license contains an integration clause, which provides that the box-top license is the final and complete expression of the terms of the parties’ agreement.

(5) The box-top license states: “Opening this package indicates your acceptance of these terms and conditions. If you do not agree with them, you should promptly return the package unopened to the person from whom you purchased it within fifteen days from date of purchase and your money will be refunded to you by that person.”

[15]    The district court, without much discussion, held, as a matter of law, that the box-top license was the final and complete expression of the terms of the parties’s agreement. Because the district court decided the questions of contract formation and interpretation as issues of law, we review the district court’s resolution of these questions de novo.

[16]    Step-Saver contends that the contract for each copy of the program was formed when TSL agreed, on the telephone, to ship the copy at the agreed price. The box-top license, argues Step-Saver, was a material alteration to the parties’ contract which did not become a part of the contract under UCC § 2-207.Alternatively, Step-Saver argues that the undisputed evidence establishes that the parties did not intend the box-top license as a final and complete expression of the terms of their agreement, and, therefore, the parol evidence rule of UCC § 2-202 would not apply.

[17]    TSL argues that the contract between TSL and Step-Saver did not come into existence until Step-Saver received the program, saw the terms of the license, and opened the program packaging. TSL contends that too many material terms were omitted from the telephone discussion for that discussion to establish a contract for the software. Second, TSL contends that its acceptance of Step-Saver’s telephone offer was conditioned on Step-Saver’s acceptance of the terms of the box-top license. Therefore, TSL argues, it did not accept Step-Saver’s telephone offer, but made a counteroffer represented by the terms of the box-top license, which was accepted when Step-Saver opened each package. Third, TSL argues that, however the contract was formed, Step-Saver was aware of the warranty disclaimer, and that Step-Saver, by continuing to order and accept the product with knowledge of the disclaimer, assented to the disclaimer.

[18]    In analyzing these competing arguments, we first consider whether the license should be treated as an integrated writing under UCC § 2-202, as a proposed modification under UCC § 2-209, or as a written confirmation under UCC § 2-207. Finding that UCC § 2-207 best governs our resolution of the effect of the box-top license, we then consider whether, under UCC § 2-207, the terms of the box-top license were incorporated into the parties’s agreement.

A. Does UCC § 2-207 Govern the Analysis?

[19]    As a basic principle, we agree with Step-Saver that UCC § 2-207 governs our analysis. We see no need to parse the parties’s various actions to decide exactly when the parties formed a contract. TSL has shipped the product, and Step-Saver has accepted and paid for each copy of the program. The parties’s performance demonstrates the existence of a contract. The dispute is, therefore, not over the existence of a contract, but the nature of its terms.
When the parties’ conduct establishes a contract, but the parties have failed to adopt expressly a particular writing as the terms of their agreement, and the writings exchanged by the parties do not agree, UCC § 2-207 determines the terms of the contract.

As stated by the official comment to § 2-207:

1. This section is intended to deal with two typical situations. The one is the written confirmation, where an agreement has been reached either orally or by informal correspondence between the parties and is followed by one or more of the parties sending formal memoranda embodying the terms so far as agreed upon and adding terms not discussed….

2. Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, any additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms.

[20]    Although UCC § 2-202 permits the parties to reduce an oral agreement to writing, and UCC § 2-209 permits the parties to modify an existing contract without additional consideration, a writing will be a final expression of, or a binding modification to, an earlier agreement only if the parties so intend.
It is undisputed that Step-Saver never expressly agreed to the terms of the box-top license, either as a final expression of, or a modification to, the parties’s agreement. In fact, Barry Greebel, the President of Step-Saver, testified without dispute that he objected to the terms of the box-top license as applied to Step-Saver. In the absence of evidence demonstrating an express intent to adopt a writing as a final expression of, or a modification to, an earlier agreement, we find UCC § 2-207 to provide the appropriate legal rules for determining whether such an intent can be inferred from continuing with the contract after receiving a writing containing additional or different terms.

[21]    To understand why the terms of the license should be considered under § 2-207 in this case, we review briefly the reasons behind § 2-207. Under the common law of sales, and to some extent still for contracts outside the UCC,
an acceptance that varied any term of the offer operated as a rejection of the offer, and simultaneously made a counteroffer.
This common law formality was known as the mirror image rule, because the terms of the acceptance had to mirror the terms of the offer to be effective. If the offeror proceeded with the contract despite the differing terms of the supposed acceptance, he would, by his performance, constructively accept the terms of the “counteroffer”, and be bound by its terms. As a result of these rules, the terms of the party who sent the last form, typically the seller, would become the terms of the parties’s contract. This result was known as the “last shot rule”.

[22]    The UCC, in § 2-207, rejected this approach. Instead, it recognized that, while a party may desire the terms detailed in its form if a dispute, in fact, arises, most parties do not expect a dispute to arise when they first enter into a contract. As a result, most parties will proceed with the transaction even if they know that the terms of their form would not be enforced. The insight behind the rejection of the last shot rule is that it would be unfair to bind the buyer of goods to the standard terms of the seller, when neither party cared sufficiently to establish expressly the terms of their agreement, simply because the seller sent the last form. Thus, UCC § 2-207 establishes a legal rule that proceeding with a contract after receiving a writing that purports to define the terms of the parties’s contract is not sufficient to establish the party’s consent to the terms of the writing to the extent that the terms of the writing either add to, or differ from, the terms detailed in the parties’s earlier writings or discussions.In the absence of a party’s express assent to the additional or different terms of the writing, section 2-207 provides a default rule that the parties intended, as the terms of their agreement, those terms to which both parties have agreed,
along with any terms implied by the provisions of the UCC.

[23]    The reasons that led to the rejection of the last shot rule, and the adoption of section 2-207, apply fully in this case. TSL never mentioned during the parties’ negotiations leading to the purchase of the programs, nor did it, at any time, obtain Step-Saver’s express assent to, the terms of the box-top license. Instead, TSL contented itself with attaching the terms to the packaging of the software, even though those terms differed substantially from those previously discussed by the parties. Thus, the box-top license, in this case, is best seen as one more form in a battle of forms, and the question of whether Step-Saver has agreed to be bound by the terms of the box-top license is best resolved by applying the legal principles detailed in section 2-207.

B. Application of § 2-207

[24]    TSL advances several reasons why the terms of the box-top license should be incorporated into the parties’ agreement under a § 2-207 analysis. First, TSL argues that the parties’ contract was not formed until Step-Saver received the package, saw the terms of the box-top license, and opened the package, thereby consenting to the terms of the license. TSL argues that a contract defined without reference to the specific terms provided by the box-top license would necessarily fail for indefiniteness. Second, TSL argues that the box-top license was a conditional acceptance and counter-offer under § 2-207(1). Third, TSL argues that Step-Saver, by continuing to order and use the product with notice of the terms of the box-top license, consented to the terms of the box-top license.

1. Was the contract sufficiently definite?

[25]    TSL argues that the parties intended to license the copies of the program, and that several critical terms could only be determined by referring to the box-top license. Pressing the point, TSL argues that it is impossible to tell, without referring to the box-top license, whether the parties intended a sale of a copy of the program or a license to use a copy. TSL cites Bethlehem Steel Corp. v. Litton Industries in support of its position that any contract defined without reference to the terms of the box-top license would fail for indefiniteness.

[26]    From the evidence, it appears that the following terms, at the least, were discussed and agreed to, apart from the box-top license: (1) the specific goods involved; (2) the quantity; and (3) the price. TSL argues that the following terms were only defined in the box-top license: (1) the nature of the transaction, sale or license; and (2) the warranties, if any, available. TSL argues that these two terms are essential to creating a sufficiently definite contract. We disagree.

Section 2-204(3) of the UCC provides:

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.

[27]    Unlike the terms omitted by the parties in Bethlehem Steel Corp., the two terms cited by TSL are not “gaping holes in a multi-million dollar contract that no one but the parties themselves could fill.” First, the rights of the respective parties under the federal copyright law if the transaction is characterized as a sale of a copy of the program are nearly identical to the parties’s respective rights under the terms of the box-top license.Second, the UCC provides for express and implied warranties if the seller fails to disclaim expressly those warranties. Thus, even though warranties are an important term left blank by the parties, the default rules of the UCC fill in that blank.

[28]    We hold that contract was sufficiently definite without the terms provided by the box-top license.

2. The box-top license as a counter-offer?

[29]    TSL advances two reasons why its box-top license should be considered a conditional acceptance under UCC § 2-207(1). First, TSL argues that the express language of the box-top license, including the integration clause and the phrase “opening this product indicates your acceptance of these terms”, made TSL’s acceptance “expressly conditional on assent to the additional or different terms”. Second, TSL argues that the box-top license, by permitting return of the product within fifteen days if the purchaser does not agree to the terms stated in the license (the “refund offer”), establishes that TSL’s acceptance was conditioned on Step-Saver’s assent to the terms of the box-top license, citing Monsanto Agricultural Products Co. v. Edenfield. While we are not certain that a conditional acceptance analysis applies when a contract is established by performance, we assume that it does and consider TSL’s arguments.

[30]    Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, any additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms.

[31]    To determine whether a writing constitutes a conditional acceptance, courts have established three tests. Because neither Georgia nor Pennsylvania has expressly adopted a test to determine when a written confirmation constitutes a conditional acceptance, we consider these three tests to determine which test the state courts would most likely apply.

[32]    Under the first test, an offeree’s response is a conditional acceptance to the extent it states a term “materially altering the contractual obligations solely to the disadvantage of the offeror”. Pennsylvania, at least, has implicitly rejected this test. In Herzog Oil Field Service, Inc., a Pennsylvania Superior Court analyzed a term in a written confirmation under UCC § 2-207(2), rather than as a conditional acceptance even though the term materially altered the terms of the agreement to the sole disadvantage of the offeror.

[33]    Furthermore, we note that adopting this test would conflict with the express provision of UCC § 2-207(2)(b). Under § 2-207(2)(b), additional terms in a written confirmation that “materially alter [the contract]” are construed “as proposals for addition to the contract”, not as conditional acceptances.

[34]    A second approach considers an acceptance conditional when certain key words or phrases are used, such as a written confirmation stating that the terms of the confirmation are “the only ones upon which we will accept orders”. The third approach requires the offeree to demonstrate an unwillingness to proceed with the transaction unless the additional or different terms are included in the contract.

[35]    Although we are not certain that these last two approaches would generate differing answers,
we adopt the third approach for our analysis because it best reflects the understanding of commercial transactions developed in the UCC. Section 2-207 attempts to distinguish between: (1) those standard terms in a form confirmation, which the party would like a court to incorporate into the contract in the event of a dispute; and (2) the actual terms the parties understand to govern their agreement. The third test properly places the burden on the party asking a court to enforce its form to demonstrate that a particular term is a part of the parties’ commercial bargain.

[36]    Using this test, it is apparent that the integration clause and the “consent by opening” language is not sufficient to render TSL’s acceptance conditional. As other courts have recognized, this type of language provides no real indication that the party is willing to forego the transaction if the additional language is not included in the contract.

[37]    The second provision provides a more substantial indication that TSL was willing to forego the contract if the terms of the box-top license were not accepted by Step-Saver. On its face, the box-top license states that TSL will refund the purchase price if the purchaser does not agree to the terms of the license. Even with such a refund term, however, the offeree/counterofferor may be relying on the purchaser’s investment in time and energy in reaching this point in the transaction to prevent the purchaser from returning the item. Because a purchaser has made a decision to buy a particular product and has actually obtained the product, the purchaser may use it despite the refund offer, regardless of the additional terms specified after the contract formed. But we need not decide whether such a refund offer could ever amount to a conditional acceptance; the undisputed evidence in this case demonstrates that the terms of the license were not sufficiently important that TSL would forego its sales to Step-Saver if TSL could not obtain Step-Saver’s consent to those terms.

[38]    As discussed, Mr. Greebel testified that TSL assured him that the box-top license did not apply to Step-Saver, as Step-Saver was not the end user of the Multilink Advanced program. Supporting this testimony, TSL on two occasions asked Step-Saver to sign agreements that would put in formal terms the relationship between Step-Saver and TSL. Both proposed agreements contained warranty disclaimer and limitation of remedy terms similar to those contained in the box-top license. Step-Saver refused to sign the agreements; nevertheless, TSL continued to sell copies of Multilink Advanced to Step-Saver.

[39]    Additionally, TSL asks us to infer, based on the refund offer, that it was willing to forego its sales to Step-Saver unless Step-Saver agreed to the terms of the box-top license. Such an inference is inconsistent with the fact that both parties agree that the terms of the box-top license did not represent the parties’s agreement with respect to Step-Saver’s right to transfer the copies of the Multilink Advanced program. Although the box-top license prohibits the transfer, by Step-Saver, of its copies of the program, both parties agree that Step-Saver was entitled to transfer its copies to the purchasers of the Step-Saver multi-user system. Thus, TSL was willing to proceed with the transaction despite the fact that one of the terms of the box-top license was not included in the contract between TSL and Step-Saver. We see no basis in the terms of the box-top license for inferring that a reasonable offeror would understand from the refund offer that certain terms of the box-top license, such as the warranty disclaimers, were essential to TSL, while others such as the non-transferability provision were not.

[40]    Based on these facts, we conclude that TSL did not clearly express its unwillingness to proceed with the transactions unless its additional terms were incorporated into the parties’ agreement. The box-top license did not, therefore, constitute a conditional acceptance under UCC § 2-207(1).

3. Did the parties’ course of dealing establish that the parties had excluded any express or implied warranties associated with the software program?

[41]    TSL argues that because Step-Saver placed its orders for copies of the Multilink Advanced program with notice of the terms of the box-top license, Step-Saver is bound by the terms of the box-top license. Essentially, TSL is arguing that, even if the terms of the box-top license would not become part of the contract if the case involved only a single transaction, the repeated expression of those terms by TSL eventually incorporates them within the contract.

[42]    Ordinarily, a “course of dealing” or “course of performance” analysis focuses on the actions of the parties with respect to a particular issue. If, for example, a supplier of asphaltic paving material on two occasions gives a paving contractor price protection, a jury may infer that the parties have incorporated such a term in their agreement by their course of performance. Because this is the parties’ first serious dispute, the parties have not previously taken any action with respect to the matters addressed by the warranty disclaimer and limitation of liability terms of the box-top license. Nevertheless, TSL seeks to extend the course of dealing analysis to this case where the only action has been the repeated sending of a particular form by TSL. While one court has concluded that terms repeated in a number of written confirmations eventually become part of the contract even though neither party ever takes any action with respect to the issue addressed by those terms, most courts have rejected such reasoning.

[43]    For two reasons, we hold that the repeated sending of a writing which contains certain standard terms, without any action with respect to the issues addressed by those terms, cannot constitute a course of dealing which would incorporate a term of the writing otherwise excluded under § 2-207. First, the repeated exchange of forms by the parties only tells Step-Saver that TSL desires certain terms. Given TSL’s failure to obtain Step-Saver’s express assent to these terms before it will ship the program, Step-Saver can reasonably believe that, while TSL desires certain terms, it has agreed to do business on other terms—those terms expressly agreed upon by the parties. Thus, even though Step-Saver would not be surprised
to learn that TSL desires the terms of the box-top license, Step-Saver might well be surprised to learn that the terms of the box-top license have been incorporated into the parties’s agreement.

[44]    Second, the seller in these multiple transaction cases will typically have the opportunity to negotiate the precise terms of the parties’s agreement, as TSL sought to do in this case. The seller’s unwillingness or inability to obtain a negotiated agreement reflecting its terms strongly suggests that, while the seller would like a court to incorporate its terms if a dispute were to arise, those terms are not a part of the parties’s commercial bargain. For these reasons, we are not convinced that TSL’s unilateral act of repeatedly sending copies of the box-top license with its product can establish a course of dealing between TSL and Step-Saver that resulted in the adoption of the terms of the box-top license.

[45]    With regard to more specific evidence as to the parties’ course of dealing or performance, it appears that the parties have not incorporated the warranty disclaimer into their agreement. First, there is the evidence that TSL tried to obtain Step-Saver’s express consent to the disclaimer and limitation of damages provision of the box-top license. Step-Saver refused to sign the proposed agreements. Second, when first notified of the problems with the program, TSL spent considerable time and energy attempting to solve the problems identified by Step-Saver.

[46]    Course of conduct is ordinarily a factual issue. But we hold that the actions of TSL in repeatedly sending a writing, whose terms would otherwise be excluded under UCC § 2-207, cannot establish a course of conduct between TSL and Step-Saver that adopted the terms of the writing.

4. Public policy concerns.

[47]    TSL has raised a number of public policy arguments focusing on the effect on the software industry of an adverse holding concerning the enforceability of the box-top license. We are not persuaded that requiring software companies to stand behind representations concerning their products will inevitably destroy the software industry. We emphasize, however, that we are following the well-established distinction between conspicuous disclaimers made available before the contract is formed and disclaimers made available only after the contract is formed. When a disclaimer is not expressed until after the contract is formed, UCC § 2-207 governs the interpretation of the contract, and, between merchants, such disclaimers, to the extent they materially alter the parties’ agreement, are not incorporated into the parties’ agreement.

[48]    If TSL wants relief for its business operations from this well-established rule, their arguments are better addressed to a legislature than a court. Indeed, we note that at least two states have enacted statutes that modify the applicable contract rules in this area, but both Georgia and Pennsylvania have retained the contract rules provided by the UCC.

C. The Terms of the Contract

[49]    Under section 2-207, an additional term detailed in the box-top license will not be incorporated into the parties’ contract if the term’s addition to the contract would materially alter the parties’ agreement.
Step-Saver alleges that several representations made by TSL constitute express warranties, and that valid implied warranties were also a part of the parties’ agreement. Because the district court considered the box-top license to exclude all of these warranties, the district court did not consider whether other factors may act to exclude these warranties. The existence and nature of the warranties is primarily a factual question that we leave for the district court,
but assuming that these warranties were included within the parties’s original agreement, we must conclude that adding the disclaimer of warranty and limitation of remedies provisions from the box-top license would, as a matter of law, substantially alter the distribution of risk between Step-Saver and TSL. Therefore, under UCC § 2-207(2)(b), the disclaimer of warranty and limitation of remedies terms of the box-top license did not become a part of the parties’ agreement.

[50]    Based on these considerations, we reverse the trial court’s holding that the parties intended the box-top license to be a final and complete expression of the terms of their agreement. Despite the presence of an integration clause in the box-top license, the box-top license should have been treated as a written confirmation containing additional terms.5 Because the warranty disclaimer and limitation of remedies terms would materially alter the parties’ agreement, these terms did not become a part of the parties’ agreement. We remand for further consideration the express and implied warranty claims against TSL.

[Students may wish to skim the following material which is not essential to understanding the issue of contract formation.]


[51]    We review the trial court’s decision to grant a directed verdict on the intentional misrepresentation claim de novo. We ask whether, considering the evidence in the light most favorable to Step-Saver, a reasonable jury could find, by clear and convincing evidence, each essential element of Step-Saver’s fraud claim: (1) a material misrepresentation; (2) an intention to deceive; (3) an intention to induce reliance; (4) justifiable reliance by the recipient upon the representation; and (5) damage to the recipient proximately caused by the misrepresentation.

[52]    To support its intentional misrepresentation claim, Step-Saver argues that TSL made specific claims, in its advertisement and in statements by its sales representatives, that the Multilink Advanced program was compatible with various MS-DOS application programs and with the Wyse terminal. To demonstrate that TSL made these compatibility representations with an intent to deceive, Step-Saver refers to several statements made in deposition testimony by the co-founders of TSL, and argues that these statements are sufficient to establish that TSL knew these compatibility representations were false at the time they were made. In particular, Step-Saver points to the statement by Mr. Robertson, one of TSL’s co-founders, that he did not know of any programs “completely compatible” with Multilink Advanced.

[53]    In determining whether Mr. Robertson’s testimony will support an inference of fraudulent intent, we, like the experts at trial, distinguish between compatibility, or practical compatibility, and complete, absolute, or theoretical compatibility. If two products are completely compatible, they will work properly together in every possible situation, every time. As Mr. Robertson explained, “complete compatibility is almost virtually impossible to obtain.” On the other hand, two products are compatible, within the standards of the computer industry, if they work together almost every time in almost every possible situation.

[54]    It is undisputed that the representations made by the sales representatives referred to practical compatibility, while Mr. Robertson’s testimony referred to complete compatibility. Because of the differences between practical and complete compatibility, as those terms are used in the industry, we agree with the district court that Mr. Robertson’s testimony about “complete compatibility” will not support a finding, under the clear and convincing standard, that TSL knew its representations concerning practical compatibility were false. In context, Mr. Robertson’s statement was simply an expression of technical fact, not an indication that he knew that Multilink Advanced failed to satisfy industry standards for practical compatibility.


[55]    Step-Saver argues that there was sufficient evidence in the record to support a jury finding that the Wyse terminal was not “fit for the ordinary purposes for which such goods are used.”
and that the trial judge should have permitted the jury to decide the implied warranty of merchantability issue.

[56]    The only evidence introduced by Step-Saver on this issue was that certain features on the WY-60 terminal were not compatible with the Multilink Advanced operating environment. For example, the WY-60 terminal originally had repeatable, instead of toggle,
NUM LOCK and CAPS LOCK keys. The combination of repeatable keys and the Multilink Advanced program caused the NUM LOCK or CAPS LOCK indicated by the terminal to become out of synchronicity with the actual setting followed by the computer. As a result, a terminal’s screen and keyboard might indicate that CAPS LOCK was on, when in fact it was off. Because of this, a user might type an entire document believing that the document was in all capital letters, only to discover upon printing that the document was in all lower case letters.

[57]    While this evidence demonstrates some compatibility problems between the WY-60 terminal and the Multilink Advanced program, Wyse introduced undisputed testimony that a user would encounter the same compatibility problems when using the Multilink Advanced operating environment on either a Kimtron KT-7 terminal, or a Link terminal, the terminals offered by Wyse’s two primary competitors. Undisputed testimony also established that Wyse had sold over one million WY-60 terminals since the terminal’s introduction in April of 1986, and that the WY-60 was the top-selling terminal in its class.

[58]    Furthermore, undisputed testimony by Wyse engineers established that the WY-60 terminals were built to industry-standard specifications for terminals designed to work with a multi-user system based on the IBM AT or XT. It is apparent that when the pieces of a system intended to work together are designed and built independently, each piece must conform to certain specifications if the pieces are to work together properly. Just as a nut and bolt must be built in a certain manner to insure their fit, so too the components of a multi-user system. Just as a bolt, built to industry standards for a certain size and thread, cannot be considered unfit for its ordinary use simply because a particular nut does not fit it, so too the WY-60 terminal.

[59]    Under a warranty of merchantability, the seller warrants only that the goods are of acceptable quality “when compared to that generally acceptable in the trade for goods of the kind.” Because the undisputed testimony established that the WY-60 terminal conformed to the industry standard for terminals designed to operate in conjunction with an IBM AT, the evidence of incompatibility with the Multilink Advanced operating system is not sufficient to support a finding that Wyse breached the implied warranty of merchantability.


[60]    We have carefully reviewed the record regarding the evidentiary rulings. For the reasons given on these two issues in the district court’s memorandum opinion rejecting Step-Saver’s motion for a new trial, we hold that the exclusion of the unsent letter and the refusal to permit rebuttal testimony on the issue of the ordinary uses of the WY-60 terminal did not constitute an abuse of discretion.


[61]    We will reverse the holding of the district court that the parties intended to adopt the box-top license as the complete and final expression of the terms of their agreement. We will remand for further consideration of Step-Saver’s express and implied warranty claims against TSL. Finding a sufficient basis for the other decisions of the district court, we will affirm in all other respects.


5.2 Principal Case – Hill v. Gateway 2000, Inc.

Hill v. Gateway 2000, Inc.

United States Court of Appeals, Seventh Circuit

105 F.3d 1147 (1997)

Easterbrook, Circuit Judge.

[1]    A customer picks up the phone, orders a computer, and gives a credit card number. Presently a box arrives, containing the computer and a list of terms, said to govern unless the customer returns the computer within 30 days. Are these terms effective as the parties’ contract, or is the contract term-free because the order-taker did not read any terms over the phone and elicit the customer’s assent?

[2]    One of the terms in the box containing a Gateway 2000 system was an arbitration clause. Rich and Enza Hill, the customers, kept the computer more than 30 days before complaining about its components and performance. They filed suit in federal court arguing, among other things, that the product’s shortcomings make Gateway a racketeer (mail and wire fraud are said to be the predicate offenses), leading to treble damages under RICO for the Hills and a class of all other purchasers. Gateway asked the district court to enforce the arbitration clause; the judge refused, writing that “[t]he present record is insufficient to support a finding of a valid arbitration agreement between the parties or that the plaintiffs were given adequate notice of the arbitration clause.” Gateway took an immediate appeal, as is its right. 9 U.S.C. § 16(a)(1)(A).

[3]    The Hills say that the arbitration clause did not stand out: they concede noticing the statement of terms but deny reading it closely enough to discover the agreement to arbitrate, and they ask us to conclude that they therefore may go to court. Yet an agreement to arbitrate must be enforced “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. Doctor’s Associates, Inc. v. Casarotto, 517 U.S. 681 (1996), holds that this provision of the Federal Arbitration Act is inconsistent with any requirement that an arbitration clause be prominent. A contract need not be read to be effective; people who accept take the risk that the unread terms may in retrospect prove unwelcome. Carr v. CIGNA Securities, Inc., 95 F.3d 544, 547 (7th Cir.1996); Chicago Pacific Corp. v. Canada Life Assurance Co., 850 F.2d 334 (7th Cir.1988). Terms inside Gateway’s box stand or fall together. If they constitute the parties’ contract because the Hills had an opportunity to return the computer after reading them, then all must be enforced.

[4]    ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996), holds that terms inside a box of software bind consumers who use the software after an opportunity to read the terms and to reject them by returning the product. Likewise, Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), enforces a forum-selection clause that was included among three pages of terms attached to a cruise ship ticket. ProCD and Carnival Cruise Lines exemplify the many commercial transactions in which people pay for products with terms to follow; ProCD discusses others. 86 F.3d at 1451-52. The district court concluded in ProCD that the contract is formed when the consumer pays for the software; as a result, the court held, only terms known to the consumer at that moment are part of the contract, and provisos inside the box do not count. Although this is one way a contract could be formed, it is not the only way: “A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance.” Id. at 1452. Gateway shipped computers with the same sort of accept-or-return offer ProCD made to users of its software. ProCD relied on the Uniform Commercial Code rather than any peculiarities of Wisconsin law; both Illinois and South Dakota, the two states whose law might govern relations between Gateway and the Hills, have adopted the UCC; neither side has pointed us to any atypical doctrines in those states that might be pertinent; ProCD therefore applies to this dispute.

[5]    Plaintiffs ask us to limit ProCD to software, but where’s the sense in that? ProCD is about the law of contract, not the law of software. Payment preceding the revelation of full terms is common for air transportation, insurance, and many other endeavors. Practical considerations support allowing vendors to enclose the full legal terms with their products. Cashiers cannot be expected to read legal documents to customers before ringing up sales. If the staff at the other end of the phone for direct-sales operations such as Gateway’s had to read the four-page statement of terms before taking the buyer’s credit card number, the droning voice would anesthetize rather than enlighten many potential buyers. Others would hang up in a rage over the waste of their time. And oral recitation would not avoid customers’ assertions (whether true or feigned) that the clerk did not read term X to them, or that they did not remember or understand it. Writing provides benefits for both sides of commercial transactions. Customers as a group are better off when vendors skip costly and ineffectual steps such as telephonic recitation, and use instead a simple approve-or-return device. Competent adults are bound by such documents, read or unread. For what little it is worth, we add that the box from Gateway was crammed with software. The computer came with an operating system, without which it was useful only as a boat anchor. See Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756, 761 (7th Cir.1996). Gateway also included many application programs. So the Hills’ effort to limit ProCD to software would not avail them factually, even if it were sound legally—which it is not.

[6]    For their second sally, the Hills contend that ProCD should be limited to executory contracts (to licenses in particular), and therefore does not apply because both parties’ performance of this contract was complete when the box arrived at their home. This is legally and factually wrong: legally because the question at hand concerns the formation of the contract rather than its performance, and factually because both contracts were incompletely performed. ProCD did not depend on the fact that the seller characterized the transaction as a license rather than as a contract; we treated it as a contract for the sale of goods and reserved the question whether for other purposes a “license” characterization might be preferable. 86 F.3d at 1450. All debates about characterization to one side, the transaction in ProCD was no more executory than the one here: Zeidenberg paid for the software and walked out of the store with a box under his arm, so if arrival of the box with the product ends the time for revelation of contractual terms, then the time ended in ProCD before Zeidenberg opened the box. But of course ProCD had not completed performance with delivery of the box, and neither had Gateway. One element of the transaction was the warranty, which obliges sellers to fix defects in their products. The Hills have invoked Gateway’s warranty and are not satisfied with its response, so they are not well positioned to say that Gateway’s obligations were fulfilled when the motor carrier unloaded the box. What is more, both ProCD and Gateway promised to help customers to use their products. Long-term service and information obligations are common in the computer business, on both hardware and software sides. Gateway offers “lifetime service” and has a round-the-clock telephone hotline to fulfil this promise. Some vendors spend more money helping customers use their products than on developing and manufacturing them. The document in Gateway’s box includes promises of future performance that some consumers value highly; these promises bind Gateway just as the arbitration clause binds the Hills.

[7]    Next the Hills insist that ProCD is irrelevant because Zeidenberg was a “merchant” and they are not. Section 2-207(2) of the UCC, the infamous battle-of-the-forms section, states that “additional terms [following acceptance of an offer] are to be construed as proposals for addition to a contract. Between merchants such terms become part of the contract unless …”. Plaintiffs tell us that ProCD came out as it did only because Zeidenberg was a “merchant” and the terms inside ProCD’s box were not excluded by the “unless” clause. This argument pays scant attention to the opinion in ProCD, which concluded that, when there is only one form, “sec. 2-207 is irrelevant.” 86 F.3d at 1452. The question in ProCD was not whether terms were added to a contract after its formation, but how and when the contract was formed—in particular, whether a vendor may propose that a contract of sale be formed, not in the store (or over the phone) with the payment of money or a general “send me the product,” but after the customer has had a chance to inspect both the item and the terms. ProCD answers “yes,” for merchants and consumers alike. Yet again, for what little it is worth we observe that the Hills misunderstand the setting of ProCD. A “merchant” under the UCC “means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction”, § 2-104(1). Zeidenberg bought the product at a retail store, an uncommon place for merchants to acquire inventory. His corporation put ProCD’s database on the Internet for anyone to browse, which led to the litigation but did not make Zeidenberg a software merchant.

[8]    At oral argument the Hills propounded still another distinction: the box containing ProCD’s software displayed a notice that additional terms were within, while the box containing Gateway’s computer did not. The difference is functional, not legal. Consumers browsing the aisles of a store can look at the box, and if they are unwilling to deal with the prospect of additional terms can leave the box alone, avoiding the transactions costs of returning the package after reviewing its contents. Gateway’s box, by contrast, is just a shipping carton; it is not on display anywhere. Its function is to protect the product during transit, and the information on its sides is for the use of handlers (“Fragile!” “This Side Up!”) rather than would-be purchasers.

[9]    Perhaps the Hills would have had a better argument if they were first alerted to the bundling of hardware and legal-ware after opening the box and wanted to return the computer in order to avoid disagreeable terms, but were dissuaded by the expense of shipping. What the remedy would be in such a case—could it exceed the shipping charges?—is an interesting question, but one that need not detain us because the Hills knew before they ordered the computer that the carton would include some important terms, and they did not seek to discover these in advance. Gateway’s ads state that their products come with limited warranties and lifetime support. How limited was the warranty—30 days, with service contingent on shipping the computer back, or five years, with free onsite service? What sort of support was offered? Shoppers have three principal ways to discover these things. First, they can ask the vendor to send a copy before deciding whether to buy. The Magnuson-Moss Warranty Act requires firms to distribute their warranty terms on request, 15 U.S.C. § 2302(b)(1)(A); the Hills do not contend that Gateway would have refused to enclose the remaining terms too. Concealment would be bad for business, scaring some customers away and leading to excess returns from others. Second, shoppers can consult public sources (computer magazines, the Web sites of vendors) that may contain this information. Third, they may inspect the documents after the product’s delivery. Like Zeidenberg, the Hills took the third option. By keeping the computer beyond 30 days, the Hills accepted Gateway’s offer, including the arbitration clause.

[10]    The Hills’ remaining arguments, including a contention that the arbitration clause is unenforceable as part of a scheme to defraud, do not require more than a citation to Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). Whatever may be said pro and con about the cost and efficacy of arbitration (which the Hills disparage) is for Congress and the contracting parties to consider. Claims based on RICO are no less arbitrable than those founded on the contract or the law of torts. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 238-42, 107 S.Ct. 2332, 2343-46, 96 L.Ed.2d 185 (1987). The decision of the district court is vacated, and this case is remanded with instructions to compel the Hills to submit their dispute to arbitration.


5.2.1 ProCD Inc. v. Zeidenberg

In Hill v. Gateway, Judge Easterbrook relies heavily on ProCD, Inc. v. Zeidenberg, an earlier decision of the Seventh Circuit that addressed a similar problem of shrink-wrap licenses. Here is an excerpt that summarizes the court’s reasoning in that case:

Must buyers of computer software obey the terms of shrinkwrap licenses? The district court held not [because] they are not contracts because the licenses are inside the box rather than printed on the outside. [W]e disagree with the district judge’s conclusion. Shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable). Because no one argues that the terms of the license at issue here are troublesome, we remand with instructions to enter judgment for the plaintiff.

According to the district court, the UCC does not countenance the sequence of money now, terms later…. To judge by the flux of law review articles discussing shrinkwrap licenses, uncertainty is much in need of reduction—although businesses seem to feel less uncertainty than do scholars, for only three cases (other than ours) touch on the subject, and none directly addresses it. [T]hese are not consumer transactions. Step-Saver is a battle-of-the-forms case, in which the parties exchange incompatible forms and a court must decide which prevails. Our case has only one form; UCC § 2207 is irrelevant.

What then does the current version of the UCC have to say? We think that the place to start is § 2-204(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.” A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. This Zeidenberg did. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance. So although the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways. ProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case in which a consumer opens a package to find an insert saying “you owe us an extra $10,000” and the seller files suit to collect. Any buyer finding such a demand can prevent formation of the contract by returning the package, as can any consumer who concludes that the terms of the license make the software worth less than the purchase price. Nothing in the UCC requires a seller to maximize the buyer’s net gains.

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1449 (7th Cir. 1996).

5.2.2 Discussion of Step-Saver and Hill v. Gateway.

One way to think about these transactions distinguishes five stages of the parties’ interaction:

(1) Preliminary contacts

(2) Order and payment

(3) Shipment of the product

(4) Opening the package and installation

(5) Use of the product

In each case, the terms that lead to legal disputes appear only at stage (4).

What is the earliest stage at which we could say that a contract has been formed? The latest stage?

Applying common law rules, what would be the contract terms under the earliest and latest possible times of formation? How would a court resolve the same issues under U.C.C. § 2-207?

What are the strongest arguments that the seller should prevail under both the common law and the UCC?

Are you more sympathetic to Judge Wisdom’s approach in Step Saver or Judge Easterbrook’s approach in Hill v. Gateway?

These teaching materials are a work-in-progress. Our reading assignments this semester will include all of the elements that make up a conventional casebook. You will read judicial opinions, statutory provisions, academic essays, and hypotheticals. You will puzzle over common law doctrines and carefully parse statutes. We will try to develop theories that can predict and justify the patterns of judicial decisions we observe.
Unlike a conventional casebook, however, I have selected each element of the readings myself. We will start at the beginning of these materials, read each assignment in order, and finish at the end. All of the reading assignments are also self-contained. When I ask you to read a statutory section or a portion of the Restatement, it will appear in the text at the point where you should read it. In addition, we will cover the entire set of materials. You will not spend the semester hauling around hundreds of extra pages that we have no time to read or discuss. At the end of each section, you will find discussion questions that track very closely the questions that I will ask during our class time together. Finally, the pages themselves are formatted to make reading easier and to give you plenty of space to take notes and mark up the text.
Our class also will use an online collaboration site to enrich and extend class discussions. This site will provide links to additional legal sources as well as questions for class discussion, practice problems, explanatory notes, and a discussion forum. The site will develop and evolve in response to your needs and interests. If you have any suggestions for changes or additions to these materials, I invite you to talk with me or post your ideas to our collaboration site.
Why study contract law?
The first semester of law school is mostly about learning to speak a new legal language (but emphatically not “legalese”), to formulate and evaluate legal arguments, to become comfortable with the distinctive style of legal analysis. We could teach these skills using almost any legal topic. But we begin the first-year curriculum with subjects that pervade the entire field of law. Contract principles have a long history and they form a significant part of the way that lawyers think about many legal problems. As you will discover when you study insurance law, employment law, family law, and dozens of other practice areas, your knowledge of contract doctrine and theory will be invaluable.
Why collaborative teaching materials?
The ultimate goal of this project is to involve many professors in producing a library of materials for teaching contracts (and other subjects). For the moment, I will be solely responsible for collecting public domain content and generating problems and explanatory essays. These embryonic reading materials will grow and evolve as I use and expand them and as other professors join in producing additional content. I gratefully acknowledge the extraordinary work of my talented research assistants who have been instrumental in helping me to put these materials together. Thanks to Sarah Bryan, Mario Lorello, Elizabeth Young, Vishal Phalgoo, Valerie Barker and Jim Sherwood.
I believe that it is equally important to involve students in the ongoing process of refining and improving how we teach legal subjects. Our collaboration site will provide a platform for student-generated content and lively dialogue. With your enthusiastic engagement, we will finish the semester with an excellent understanding of contracts and a useful collection of reference materials. I invite each of you to join us for what will be a challenging, sometimes frustrating, but ultimately rewarding, intellectual journey.

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