Offer and Acceptance in Modern Contract Law: A Needless Concept

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Offer and Acceptance in Modern Contract Law: A Needless Offer and Acceptance in Modern Contract Law: A Needless

Concept Concept

Shawn J. Bayern

Florida State University College of Law

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Offer and Acceptance in Modern Contract Law: A Needless Concept

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CAL. L. REV.

(2015),

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Offer and Acceptance in Modern

Contract Law: A Needless Concept

Shawn J. Bayern*

The fundamental law of contract formation has retained the

formalistic character of classical contract law. The offer-and-

acceptance paradigm fits poorly with modern contracting practice,

and it obscures and complicates contract doctrine. More importantly,

extending it threatens to produce undesirable results. Instead of the

offer-and-acceptance paradigm, this Essay proposes that contract

formation be analyzed using the same general interpretive inquiry

that governs other questions concerning the intent of contracting

parties.

Analyzing the processes of contract formation in this manner

points the way toward a further-reaching reconsideration of the

purposes of contract-formation law in the first place. In particular,

this Essay proposes a reevaluation of the rule that parties cannot

unilaterally rescind a contract immediately after the law deems it to

be formed. Such a rule, too, is largely formalistic. In its place, the

Essay offers a rule of contract formation that is more closely tied to

the moral and instrumental purposes of contract remedies.

Introduction ........................................................................................................ 68

I. Contract Formation: A Neglected Topic ................................................ 69

II. The Doctrinal Distraction of “Offer and Acceptance” ........................... 73

A. Needless Complication .................................................................... 75

California nonprofit corporation. CLR and the authors are solely responsible for the content of

their publications.

* Larry & Joyce Beltz Professor, Florida State University College of Law. This Essay has

benefitted from discussions with Hugh Beale, Curtis Bridgeman, Steven Burton, Melvin Eisenberg,

Mark Gergen, Christopher Leslie, Hector MacQueen, Mark Seidenfeld, and Mark Spottswood. I also

thank participants at the Obligations VI conference in Ontario and the Transatlantic Perspectives

conference in Edinburgh for insightful, internationally comparative feedback, and those at a Berkeley

Law workshop on Melvin Eisenberg’s work for enlightening discussion. Not all offered criticism has

been accepted.

68 CALIFORNIA LAW REVIEW [Vol. 103:67

1. Needless Obscurity.................................................................... 77

2. Needless Categorization ............................................................ 80

a. A Failure to Generalize: Implied-in-Fact Contracts

and Other Similar Cases ..................................................... 80

b. The Search for False Certainty ........................................... 81

B. Potentially Poor Results .................................................................. 84

III. Moving Beyond Offer and Acceptance .................................................. 90

A. Conversation Plus: Putting Dialogue in Its Place ........................... 90

B. Acceptance and Irreversibility: Tying Contract Formation to

the Purposes of Contract Remedies ................................................ 92

1. Insufficient Justifications for Enforcement: Immediate

Irreversibility and the Functions of Contract Enforcement ...... 93

2. Affirmative Arguments for Reversibility ................................. 98

Conclusion ........................................................................................................ 100

INTRODUCTION

The notion that contracts require an offer and an acceptance is one of the

last remaining bastions of classical contract law. On reflection, it is striking

how poorly the offer-and-acceptance paradigm fits large areas of contracting

practice; it is simply untrue that all or even most contracts are formed by means

of a salient or even recognizable offer followed by a similarly salient

acceptance. Instead, contracts are formed in different ways as suit the different

circumstances of contracting parties. For example, the parties might

contemporaneously sign a common document, shake hands, use a series of

increasingly certain verbal cues to indicate that they believe themselves to be

bound, or allow a third party or computer technology to match them firmly with

one another. Moreover, even in cases that may fit factually into the classical

offer-and-acceptance paradigm, the model tends to obscure the substantive and

interpretive questions that underlie contract formation.

The problem is not necessarily debilitating. Perhaps surprisingly, doing

away with the paradigm and terminology of “offer” and “acceptance” would

not, on its own, amount to a radical change to modern contract law.

Nonetheless, the offer-and-acceptance paradigm has a sufficiently significant

effect on contract law that it is helpful to highlight its weaknesses. Most

directly, exposing its problems may discourage courts and commentators from

extending the model beyond the cases to which it is most directly applicable;

stretching the paradigm invites at best awkwardness and at worst poor

decisions. Similarly, brushing away the offer-and-acceptance paradigm can

highlight useful modes of contract formation that have not received sufficient

attention or study.

Perhaps more importantly, moving past the offer-and-acceptance

paradigm reveals the relatively poor functional basis for what is taken to be a

core principle of contract law—namely, that immediately subsequent to an

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 69

acceptance that concludes a contract, a promise is established and expectation

damages are available. This rule of irreversibility may be loosely justified on

grounds of administrability, but overall it has a poor fit with both commercial

practice and with the functional, substantive goals of contract law. The

classical, formalistic model of contract formation should be replaced with a rule

that depends more directly on the timing and possibility of performance

preparations, promisee reliance, and financial speculation by one party at the

expense of the other. Such a rule would comport better with morality,

efficiency, and the basic underlying rationales for contract enforcement.

This Essay first, in Part I, considers the relatively scant literature on

contract formation. Compared with other areas of contract law, fundamental

formation doctrine has received relatively little study , and this may be why the

area has progressed less beyond the classical, formalistic rules. Part II

addresses doctrinal problems with the notion of offer and acceptance,

essentially mounting an internal legal critique of the doctrine. The chief

argument in Part II is that in view of doctrinal coherence and simplicity as well

as broad congruence with contracting practice, the offer-and-acceptance

doctrine should be replaced with a more direct substantive evaluation of

parties’ expectations. In Part III, the Essay develops a more robust theory of

contract formation that takes into account both the instrumental role of

damages and the noninstrumental concerns associated with enforcing promises

that are retracted shortly after they are made.

ONTRACT FORMATION: A NEGLECTED TOPIC

Relatively few significant articles over the last several decades have

evaluated the fundamental doctrine of contract formation—the offer-and-

acceptance paradigm itself. Many commentators have devoted attention to a

variety of important, specific formation-related problems, such as questions of

precontractual liability,

the battle of the forms,

form contracts and related

problems of assent,

and the special problems of software contracts and other

1. See, e.g., E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair

Dealing and Failed Negotiations, 87 C

OLUM. L. REV. 217 (1987); Juliet P. Kostritsky, Bargaining

with Uncertainty, Moral Hazard, and Sunk Costs: A Default Rule for Precontractual Negotiations, 44

ASTINGS L.J. 621 (1993).

2. See, e.g., Douglas G. Baird & Robert Weisberg, Rules, Standards, and the Battle of the

Forms: A Reassessment of §2-207, 68 V

A. L. REV. 1217 (1982); Victor P. Goldberg, The “Battle of

the Forms”: Fairness, Efficiency, and the Best-Shot Rule, 76 O

R. L. REV. 155 (1997); Daniel Keating,

Exploring the Battle of the Forms in Action, 98 M

ICH. L. REV. 2678 (2000); John E. Murray, Jr., The

Chaos of the “Battle of the Forms”: Solutions, 39 V

AND. L. REV. 1307 (1986).

3. See, e.g., Shmuel I. Becher, Behavioral Science and Consumer Standard Form Contracts,

68 L

A. L. REV. 117 (2007); David Gilo & Ariel Porat, The Hidden Roles of Boilerplate and Standard-

Form Contracts: Strategic Imposition of Transaction Costs, Segmentation of Consumers, and

Anticompetitive Effects, 104 M

ICH. L. REV. 983 (2006); Robert A. Hillman, Rolling Contracts, 71

ORDHAM L. REV. 743 (2002); Russell Korobkin, Bounded Rationality, Standard Form Contracts, and

70 CALIFORNIA LAW REVIEW [Vol. 103:67

online contracts.

My concern is more fundamental than these particular

problems—it is with the foundational doctrine of offer and acceptance itself.

In the last twenty years or so, there have been some interesting

contributions to foundational contract-formation doctrine from legal-economic

scholars. In 1990, Avery Katz analyzed contract formation in terms of game

theory.

His analysis was largely descriptive and informative, showing the

effects of various bargaining rules on the decisions of rational (and imperfectly

rational) parties.

For example, Professor Katz identified several sorts of

transaction costs that legal rules governing bargaining might create, including

costs of communication and, probably more notably, costs of “strategic

behavior.”

Thus, for example, parties might bluff, adopt hard lines in

bargaining, and do other things that have the potential to destroy or enhance

value. As a whole, Katz sought to provide clearer ways to consider formation

doctrine and to understand its incentive effects.

Unconscionability, 70 U. CHI. L. REV. 1203 (2003); John E. Murray, Jr., The Dubious Status of the

Rolling Contract Formation Theory, 50 D

UQ. L. REV. 35 (2012).

4. See, e.g., Juliet M. Moringiello, Signals, Assent and Internet Contracting, 57 R

UTGERS L.

REV. 1307 (2005); David A. Szwak, Uniform Computer Information Transactions Act [U.C.I.T.A.]:

The Consumer’s Perspective, 63 L

A. L. REV. 27 (2002).

5. Even Grant Gilmore’s wide-ranging book criticizing classical contract law does not offer a

specific critique of foundational offer-and-acceptance doctrine. See generally G

RANT GILMORE, THE

DEATH OF CONTRACT (Ronald K.L. Collins ed., 2d ed. 1995).

Ian R. Macneil and Stewart Macaulay’s relational view of contracting addresses broader concerns

but does recognize the potential “fuzziness” of formal acceptance that I discuss in Parts II and III. For

example, Macneil has written:

The context of “I accept employment on your terms” is a recognition of the inevitable

tentativeness of consent to a relation, the inevitable mutuality of future superseding events,

and all the rest of the elements which, in a relation, cause even the clearest expression of

adhesive consent to suffer from essential fuzziness.

Ian R. Macneil, The Many Futures of Contracts, 47 S.

CAL. L. REV. 691, 771 (1974); see also Stewart

Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 A

M. SOC. REV. 55, 55

(suggesting that businesspeople often do not “plan exchange relationships completely”). Though my

approach to contract law is sympathetic with many features of the relational theorists’ arguments, the

principles I develop do not generally turn directly on the status of a prior relationship. My inquiry is, in

some sense, broader and more fundamental, and it aims to analyze contract doctrine directly and

generally. Cf. Melvin A. Eisenberg, Why There Is No Law of Relational Contracts, 94 N

W. U. L. REV.

805, 821 (2000) (praising relational contract theory in several respects but noting that it has not

developed a “law of relational contracts” because there is “no significant difference between contracts

as a class and relational contracts” and, accordingly, “relational contracts must be governed by the

general principles of contract law, whatever those should be.”).

6. See Avery Katz, The Strategic Structure of Offer and Acceptance: Game Theory and the

Law of Contract Formation, 89 M

ICH. L. REV. 215 (1990).

7. Katz agrees with me about the relative paucity of analytical study of offer-and-acceptance

rules, at least as of 1990 and with regard to economic commentary:

[T]he mechanical rules of contract formation so beloved to hornbook authors and bar

examiners, and the related body of legal doctrine that helps imply the content of the contract

from the history of the bargaining, largely have escaped attention from those legal scholars

influenced by economics. The preponderance of the literature treats such rules as largely

conventional, and accordingly irrelevant for purposes of policy analysis.

Id. at 218 (footnote omitted).

8. See id. at 226.

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 71

In an interesting and helpful article a few years later, Richard Craswell

analyzed contract formation and related it to the notion of efficient reliance in

light of possible breach.

To understand Craswell’s article, it is important to

understand the (hotly contested) economic notion that contract law should

recognize that promisees cannot always expect performance and thus should

not always rely on promises.

Consider the following example:

Yvonne owns a restaurant for economists called the Waffle Shop.

Business is going well, and Yvonne contracts with Xavier to build a

new facility to be ready for occupancy by September 1. Many things

could prevent Xavier from completing on time—bad weather, a

plumbers’ strike, overscrupulous or unscrupulous city inspectors, and

so on. To serve the new customers who will patronize the new facility,

Yvonne must order more food, and she must order it before September

1. Greater expenditures on food will increase her profits from the

restaurant, since she will then be able to serve more customers in the

period following September 1.

Under the standard calculation of expectation damages, a promisee

will increase expenditures in reliance on a contract up to the point

where the expected gain from an incremental increase in such

expenditures equals the cost of the incremental increase. Now, even if

the promisor fully internalizes all the costs of breach that are borne by

the promisee, there is some chance that the promisor (Xavier, in the

hypothetical) will breach—for example, if the costs of performing

unexpectedly turn out to be prohibitive. In choosing the socially

optimal amount of reliance on the contract, the promisee (Yvonne, in

the hypothetical) should take this chance of non-performance into

account. However, the standard expectation measure does not give the

promisee an incentive to choose the socially optimal level of reliance.

In particular, when calculating the expected gain from an increase in

reliance expenditures, the promisee will not discount that expected

gain by the probability that the promisor will breach. From the

promisee’s point of view, it is as if the promisor had insured the

promisee that the contract would be performed. The promisee thus acts

as if performance is certain, and chooses a level of reliance on the

promise consistent with that assumption. The level of reliance so

chosen will be higher than the level that would be chosen if the

9. See Richard Craswell, Offer, Acceptance, and Efficient Reliance, 48 STAN. L. REV. 481

(1996).

10. See Steven Shavell, Damage Measures for Breach of Contract, 11 B

ELL J. ECON. 466

(1980) (modeling the relationship between remedial regimes and overreliance); Steven Shavell, The

Design of Contracts and Remedies for Breach, 99 Q.J.

ECON. 121, 124 (1984); but see Shawn J.

Bayern & Melvin A. Eisenberg, The Expectation Measure and Its Discontents, 2013 M

ICH. ST. L.

REV. 1, 6–13 (2013); Melvin A. Eisenberg & Brett H. McDonnell, Expectation Damages and the

Theory of Overreliance, 54 H

ASTINGS L.J. 1335, 1373–74 (2003) (critiquing the notion that

overreliance should affect contract law and concluding instead that “[w]hen institutional considerations

are taken into account . . . the theory has virtually no consequences.”).

72 CALIFORNIA LAW REVIEW [Vol. 103:67

promisee assumed that the promisor had a positive probability of

breach. Choosing the higher level is inefficient. Accordingly, the

expectation measure is flawed.

In view of this potential drawback of expectation damages, Professor

Craswell’s article on the offer-and-acceptance paradigm argued that it is at least

possible that rules of contract formation can promote efficient reliance. In

particular, he concluded descriptively that courts tend to find that enforceable

contracts have been formed (via rules of offer and acceptance) when they judge

that the promisee’s reliance would have been efficient.

Normatively,

however, he concluded that it would be difficult to fashion specific rules of

contract formation to encourage efficient reliance on promises, largely because

efficient reliance needs to be determined case by case.

For my purposes, the most helpful modern article on contract formation is

by leading contract-law scholar Melvin Eisenberg. In 1994, Professor

Eisenberg introduced the notion of expression rules as a way to analyze,

doctrinally and normatively, contract law’s rules of contract formation.

The

fundamental insight of Professor Eisenberg’s article is that many specific rules

of offer and acceptance are really just crude substitutes for the general rules of

contract interpretation—that is, bright-line rules about how to interpret certain

types of expressions that parties make to one another.

For example, contract law has a rule that ordinary advertisements do not

constitute offers.

If there were no such rule, then in evaluating whether a

particular advertisement is an offer for the purposes of contract law, we would

simply ask whether a reasonable person reading it would interpret it as an offer.

Essentially, we would apply ordinary interpretive rules to determine the legal

effects of an advertisement, just as we do to analyze most other potential offers.

Indeed, Eisenberg provides a persuasive account that most people would, under

most circumstances and contrary to the technical rule of contract law, believe

that advertisements are offers.

It is not clear, as a result, why the historical

rule about advertisements is desirable.

At the very least, if the rule is

justifiable, it is probably justifiable despite contracting parties’ expectations,

not because of them.

As another example, Eisenberg considers the rule that an offer made

during a conversation (in person or over a telephone call) lapses at the end of

11. Melvin A. Eisenberg & Brett H. McDonnell, Expectation Damages and the Theory of

Overreliance, 54 H

ASTINGS L.J. 1335, 1337–38 (2003) (paraphrasing and analyzing ROBERT COOTER

& THOMAS ULEN, LAW AND ECONOMICS 248–57 (3d ed. 2000)).

12. Craswell, supra note 9, at 508–31.

13. Id. at 544–53.

14. Melvin Aron Eisenberg, Expression Rules in Contract Law and Problems of Offer and

Acceptance, 82 C

ALIF. L. REV. 1127 (1994).

15. Id. at 1166–72.

16. See id.

17. Id. at 1171–72.

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 73

the conversation.

Parties might or might not expect the operation of this rule,

but the rule is again easier to justify—in terms of the morality and efficiency

associated with promises—if they do. If not, the rule potentially undermines

both the opportunity for efficient deals and the morality of promises.

That is,

if parties expect a deal that is cut off by the bright-line rule that offers lapse at

the end of conversations, then the law refuses to recognize a deal that they

wanted and under which at least one of them has promissory obligations.

Eisenberg’s general thesis is that, with few exceptions, most of the

expression rules in contract-formation doctrine are unjustified and that the law

should move (and is moving) away from such rules and toward general

principles of interpretation: “For the most part, therefore, expression rules that

are justified at all should be cast as either weak presumptions or as maxims. If

we look past the black-letter rules to the case law, that is just the direction in

which contract law is moving.”

As we will see in Part III, a central thesis of

this Essay is essentially to expand Eisenberg’s argument in the following way:

general interpretive principles should replace not just individual expression

rules (operating within the offer-and-acceptance paradigm) but the whole

notion of offer and acceptance. Just as individual rules governing whether

advertisements are offers may be judged by how well they vindicate the

expectations of commercial parties, applying the same analysis to the offer-

and-acceptance doctrine shows that it does no better, in practice or in theory,

than a general interpretive inquiry—that is, the ordinary legal construction of

the parties’ intent.

II.

HE DOCTRINAL DISTRACTION OF “OFFER AND ACCEPTANCE”

This Part contends that the threshold question of contract formation that is

addressed by the doctrine of offer and acceptance should be replaced by a

simpler, more straightforward inquiry: Does one of the parties to a potential

contract reasonably believe there is a contract? This is the preliminary result

achieved when the offer-and-acceptance doctrine works properly, and indeed it

is the ordinary result. For example, if Buyer makes an offer to Seller to

purchase a parcel of real property for $250,000 and Seller responds in a

potentially ambiguous manner, contract law will ordinarily evaluate Seller’s

use of language from the perspective of a reasonable person in Buyer’s

position; it will ask, in other words, whether Buyer reasonably believes that

Seller accepted Buyer’s offer.

That is fundamentally the same general

question I am proposing.

18. See id. at 1153–56.

19. See id.

20. Id. at 1180.

21. See R

ESTATEMENT (SECOND) OF CONTRACTS § 57 (1981) (“Where notification is

essential to acceptance by promise, the offeror is not bound by an acceptance in equivocal terms unless

74 CALIFORNIA LAW REVIEW [Vol. 103:67

Distinguishing between subjective and reasonable objective belief may be

useful here, although the interplay between subjectivity and objectivity in

contract law is complicated. Where both parties subjectively believe there is a

contract, that shared belief is ordinarily sufficient, at least under modern

American contract law, for there to be a contract.

Where neither party

believes there is a contract, the prominence of subjective intent is similar: there

is no contract.

The difference between the “subjective” interpretations that the

parties actually hold and the “objectively reasonable” interpretations that those

in the parties’ positions might hold arises only when the parties’ subjective

understandings are different. In that case, the more reasonable meaning prevails

(except where one of the parties knew or should have known of the

misunderstanding).

To clarify this Part’s thesis in view of the distinctive roles of subjectivity

and objectivity in modern American contract law, then, it is that the following

principles should replace the offer-and-acceptance doctrine: (1) if both parties

believe there is a contract, there should be a contract; (2) if one of the parties

believes there is a contract, and that belief is more reasonable than the other

party’s belief that there is no contract, there should be a contract. (This is just

an elaboration of the simpler principle I stated at the outset.)

he reasonably understands it as an acceptance.”); cf. id. § 24 (“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.”).

22. See id.

§ 201(1) (“Where the parties have attached the same meaning to a promise or

agreement or a term thereof, it is interpreted in accordance with that meaning.”); Eisenberg, supra note

14, at 1134 (“Restatement Second stands the classical school’s position on its head by giving primacy

to mutually held subjective interpretation, and resorting to an objective or reasonable meaning only in

the absence of a mut[u]ally held subjective meaning.”).

23. See R

ESTATEMENT (SECOND) OF CONTRACTS § 201(1) (1981); 6 PETER LINZER, CORBIN

CONTRACTS § 25.1 (Joseph M. Perillo ed., 2010) (“No contract should ever be interpreted and

enforced with a meaning that neither party gave it.”).

24. See R

ESTATEMENT (SECOND) OF CONTRACTS § 201(2) (1981) (“[T]he meaning attached

by [the first party prevails when] (a) that party did not know of any different meaning attached by the

other, and the other knew the meaning attached by the first party; or (b) that party had no reason to

know of any different meaning attached by the other, and the other had reason to know the meaning

attached by the first party.”). Note that the Restatement technically appears to draw a dichotomy

between reasonable and unreasonable interpretive beliefs, rather than to conceive reasonableness on a

spectrum and to favor the better of two potentially reasonable interpretations. Cf. Melvin Aron

Eisenberg, The Role of Fault in Contract Law: Unconscionability, Unexpected Circumstances,

Interpretation, Mistake, and Nonperformance, 107 M

ICH. L. REV. 1413, 1422–24 (2009) (generalizing

from the Restatement in a similar way to find an interpretive principle based on the parties’ fault).

25. Another elaboration may be worthwhile. To say that the test should be whether at least one

of the parties thinks there is a contract (or both subjectively do) is potentially vague; it may help to add

that the reasonable belief (or shared subjective belief) is about particular enforceable contract terms. In

my view, the appropriate question for courts to ask is almost never “Is there a contract?” but rather

“What enforceable terms, if any, are there between the parties?”

Accordingly, the beliefs of the contracting parties that I have in mind in the text are those

concerning the existence of (usually specifiable) enforceable terms, not merely the existence vel non of

a contract in the abstract. As it turns out, almost nothing in contract law depends on the precise

establishment or timing of the formation of “a contract” rather than of particular duties under it; though

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 75

Instead of applying these general principles of interpretation, the current

fundamental law of “offer and acceptance” (and again, by fundamental I refer

to the core presence of the doctrine, not to the many ancillary rules about when

and whether an offer can be revoked, precisely when various communications

are legally effective, precontractual liability, and so forth) serves as a workable

but potentially awkward placeholder. The existing fundamental rules present

two closely related dangers discussed below: (A) needless complication and

(B) potentially poor results as the basic offer-and-acceptance paradigm is

stretched.

A. Needless Complication

The simple mismatch between courts’ descriptions of the doctrine and

frequent contracting practice demonstrates the needless complication of the

current doctrine. Courts often declare that contracts require offer and

acceptance,

but contracting practice itself suggests otherwise, or at least

suggests that the definitions of offer and acceptance are often very thinly

stretched.

For example, a common way to conclude a contract is for two parties to

sign a document together. If the signatures are literally simultaneous (or their

processes overlap temporally), there is no sequence of final communications;

there is simply a joint act creating a contract. The same applies to shaking

hands, which is perhaps an even more conventional way of indicating an

agreement. In these cases, there is no discrete, identifiable sequence of offer

and acceptance.

Even in the case where one party signs a contract just before another (so

that there is technically a sequence of events leading up to contract formation),

to call the first signature an offer and the second an acceptance may be

distracting and even untenable. If nothing else, such terminology stretches the

ordinary definitions of the terms and seems to serve little function. Perhaps in

that matter is beyond the scope of this Essay, it is worth pointing out that even largely formal

endeavors, like computations of the intervals associated with statutes of limitations, depend on the

timing of breach (of particular duties) rather than of formation.

26. See, e.g., Int’l Bus. Machs. Corp. v. Johnson, 629 F. Supp. 2d 321, 330 (S.D.N.Y. 2009)

(“The formation of a valid, express contract under New York law requires an offer, acceptance,

consideration, mutual assent, and intent to be bound.”); Dantz v. Apple Ohio LLC, 277 F. Supp. 2d

794, 801 (N.D. Ohio 2003) (“What is required to validate the arbitration agreement and make it

contractual is an offer and acceptance, supported by consideration.”); In re Estate of Kampen, 135 Cal.

Rptr. 3d 410, 425 (Ct. App. 2011) (“It is elementary that a contract requires an offer and

acceptance . . . .”); R.C. Constr. Co. v. Nat’l Office Sys., 622 So. 2d 1253, 1255 (Miss. 1993) (“It is

basic contract law that a contract requires an offer and acceptance.”); May v. Anderson, 119 P.3d

1254, 1257 (Nev. 2005) (“Basic contract principles require, for an enforceable contract, an offer and

acceptance, meeting of the minds, and consideration”); Cargill, Inc. v. Kavanaugh, 228 N.W.2d 133,

138 (N.D. 1975) (“Basically, Hornbook law (i.e., Simpson on Contracts) tells us that a contract

requires an offer, and acceptance of that offer, and mutual acceptance and understanding of the offeror

and offeree as to the terms of the legally enforceable obligation thus incurred.”).

76 CALIFORNIA LAW REVIEW [Vol. 103:67

some cases the act of signing a document is meant to convey an offer (“I have

committed; now it is your turn to do so”), but this is not necessarily true. In the

typical case of jointly signed agreements, the parties have worked out the

details through an ongoing process in which they gradually reached an

understanding, in no particular sequence, and understand that they will finalize

the deal by signing a document jointly. That is, the second-to-last step in

forming a contract might not have any role in inviting the final one. And, to say

that the offer-and-acceptance paradigm is serviceable because courts and

commentators can always identify some second-to-last act (called an offer) and

some final act (called an acceptance) that bring a contract into existence

seems to miss the point that many such acts are not offers or acceptances except

in a very stylized sense. More subtly (and admittedly fancifully), when

contracts are concluded at a distance, it may be not only practically impossible

to say which act was the second-to-last and which was the last, but also

theoretically indeterminate under the theory of special relativity.

More practically speaking, contract doctrine at best spins its wheels

needlessly in trying to classify various actions as offers or acceptances when it

should be asking a more direct interpretive question concerning the parties’

intent. This problem manifests itself in two ways: (1) the doctrine obscures the

underlying substantive questions of modern contract law, and (2) it adopts

needless categories that, as I have already suggested, fit poorly with practical

contracting practice.

27. See, e.g., Jay M. Feinman & Stephen R. Brill, Is an Advertisement an Offer? Why It Is, and

Why It Matters, 58 H

ASTINGS L.J. 61, 64 (2006) (referring in passing to a classical theory of contract

law that equates an offer with “the penultimate step in the creation of a legal relationship”).

28. The theory of special relativity teaches us, counterintuitively, that simultaneity in the

absence of causation is relative; that is, determining the sequence of events depends on an arbitrary

selection among many possible reference points. If two events (A and B) occur in different places and

are not causally related, it is consistent with the universe to say, from various perspectives, that A

occurred first, that B occurred first, or that A and B were simultaneous. See A

LBERT EINSTEIN,

ELATIVITY: THE SPECIAL AND GENERAL THEORY (1920); D. F. Comstock, The Principle of

Relativity, 31 S

CI. 767, 769 (1910) (“Neither the standpoint of the ‘moving’ observer nor our

standpoint is wrong. The two merely represent two different sides of reality.”). So when an offer does

not in fact invite the particular acceptance at issue (and thus serve as what business people typically

mean by “offer”), it may be theoretically impossible to say in an absolute or objective sense which of

the parties’ acts, concluded at some distance from one another, occurred first. I don’t suppose this

theoretical limitation is particularly important from a practical perspective when contracts are

concluded on Earth or its vicinity (any more than, for example, I think that Gödel’s incompleteness

theorem poses practical challenges for interpreting contracts, though some may think that). See

generally Mike Townsend, Implications of Foundational Crises in Mathematics: A Case Study in

Interdisciplinary Legal Research, 71 W

ASH. L. REV. 51 (1996) (discussing generally the overreaching

of mathematical theory, including Gödel’s theorem, in areas beyond its domain). But it is at least

interesting that a conceptualist model of contract law that wishes to declare every contract formed

through a sequence of events, of which one is an offer and one is an acceptance, can theoretically run

into a physical boundary that makes it impossible to say which is which. In other words, while

physical theory probably does not matter directly in setting general rules for how contracts are formed,

it may still be worthwhile to recognize that the conceptual simplicity sought by classical contract law

may not even be consistent, in all cases, with the real universe.

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 77

1. Needless Obscurity

As an example of the first problem, consider International Filter Co. v.

Conroe Gin, Ice & Light Co.

International Filter, which made water filters,

sent its representative (the appropriately named Mr. Waterman) to negotiate

with buyers. Mr. Waterman sent a document to a potential buyer that read as

follows:

Gentlemen: We propose to furnish, f.o.b. Chicago, one No. two Junior

(steel tank) International water softener and filter to purify water of the

character shown by sample to be submitted. * * *

Price: Twelve hundred thirty ($1,230.00) dollars. * * *

This proposal is made in duplicate and becomes a contract when

accepted by the purchaser and approved by an executive officer of the

International Filter Company, at its office in Chicago. Any

modification can only be made by duly approved supplementary

agreement signed by both parties.

This proposal is submitted for prompt acceptance, and unless so

accepted is subject to change without notice.

Respectfully submitted,

International Filter Co.,

W.W. Waterman.

This document elicited a response, in the form of a letter, by the buyer:

Accepted Feb. 10, 1920. Conroe Gin, Ice, and Light Co.,

By Henry Thompson, Mgr.

Subsequently, at the Chicago office of International Filter, an officer

described as “its President and Vice-President” wrote on the letter “O.K.” with

the date and his name, and thereafter International Filter wrote a letter to the

buyer confirming the order.

The buyer later sought to cancel the order against

International Filter’s wishes, and thus a contract dispute arose.

In particular,

the buyer alleged that no contract had been formed, in part because the internal

notation of an acceptance by an officer of International Filter was not legally an

acceptance.

The court held that under traditional contract-law principles, the original

document signed by Waterman was not an offer because the buyer could not

accept it; it was just what is sometimes called an “invitation to deal.”

The

response by the buyer indicating that the buyer had “[a]ccepted” the terms of a

29. 277 S.W. 631 (Tex. Comm’n App. 1925).

30. Id. at 631.

31. Id.

32. Id. at 631–32.

33. Id. at 632.

34. Id.

35. Id.

78 CALIFORNIA LAW REVIEW [Vol. 103:67

deal was correspondingly just itself an offer, and the acceptance and thus

formation of a contract occurred when International Filter’s officer wrote

“O.K.” on the document.

The court’s determination that there was a binding contract seems correct,

at least on the facts it reported; that is, International Filter appears reasonable in

believing that a contract had been formed.

But the court’s treatment of the

various documents seems, at best, roundabout. The original document issued by

Waterman had all the substance of an offer except that it required a final step

for approval, signaling that Waterman was not himself authorized to conclude a

contract. The buyer clearly perceived the self-styled acceptance as an

acceptance, not an offer. It may have been an acceptance of a conditional offer

(conditioned on further approval), but it was still substantively an expression of

a definite intent to be bound to terms that had already been proposed.

Instead of treating the writing of “O.K.” by International Filter’s officer as

the act that formed a contract, the requirement for later approval should be

analyzed simply as a condition for performance. This form of analysis has

several advantages over the court’s. First, it’s simpler: it doesn’t require

introducing a new kind of acceptance (which at least one leading American

contract-law casebook calls “subjective acceptance”).

Second, it accords

more readily with the bilateral nature of the contract in International Filter.

The response by Conroe Gin is arguably not a promise, and if the original

document from Waterman is interpreted as an invitation to deal, it arguably

contains no enforceable promise either. Yet it is clear that both parties have

ongoing obligations once a contract is formed.

Third, the more general “condition” analysis seems to accommodate a

wider range of cases. For instance, I assume there would be a contract (with a

condition) if International Filter’s original document demanded later

“approval” by a state regulatory agency or another interested third party instead

of from International Filter itself. In that case, the original document and the

response would be sufficient to give rise to a contract. Under the subjective

acceptance analysis, this sufficiency can evaporate based only on the identity of

the party whose later approval is required. There’s nothing inherently wrong

with that result if it doesn’t change the parties’ rights and duties, but it is

doctrinally cumbersome; the forms of the proposal and acceptance haven’t

changed, but their nature and effects differ depending on whose later approval

is required.

Perhaps more significantly, what if International Filter’s original

document (which otherwise had the characteristics of an offer) had contained

the following provision: “Neither party will have any obligations unless

36. Id.

37. Id. at 632–33.

38. L

ON L. FULLER ET AL., BASIC CONTRACT LAW 530–34 (9th ed. 2013).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 79

executives from both our organizations—separately and subjectively—approve

this transaction”? Suppose the buyer then “accepted” this proposal, and the

parties each then forwarded the agreement to their executives, who both

approved it. If contractual liability results, as it should because the parties both

intend to be bound,

the “condition” analysis would lead us to say simply that

International Filter’s proposal is an offer and the buyer’s agreement an

acceptance—that is, an offer and an acceptance of a contract with two distinct

conditions. By contrast, under the “subjective acceptance” analysis that the

International Filter court used, it seems as if the subjective executive approval

that happens to occur first is something like a “subjective offer” and the second

a “subjective acceptance.” There is little problem in saying this if it is the only

way to reach the right result under existing doctrine, but it is cumbersome and

entirely unnecessary.

I strongly suspect that the only reason that the International Filter court

introduced the notion of “subjective acceptance” was classical contract law’s

refusal to see consideration in an “illusory” promise. Under classical contract

principles, if International Filter can later choose not to be bound, there must

(by deduction) be no contract.

But under modern contract law’s significantly

less formal views of consideration, it is easy to see the mutual consideration in

the various hypothetical contracts I have outlined. Once we brush away the

illusory-promise doctrine, a more general principle for contract formation

emerges that is both simpler and more expressive than the offer-and-acceptance

doctrine: specifically, there is no essential difference between (on one hand) a

contract with performance conditioned on an event and (on the other hand) a

commercial promise conditioned on the offeree’s acceptance. Acceptance is

just one kind of event on which a promise’s performance can be conditioned.

If, as leading functionalist scholars have proposed, questions of consideration

in contract law exist largely to differentiate commercial from noncommercial

promises,

there is likely no consideration-based reason to distinguish an

39. Alternatively, if there is no contract, it is hard to see why. That is, why should an extra step

(such as prior explicit approval by one executive) be necessary for two agents to conditionally bind

one another’s principals based on those principals’ subsequent internal acts if the agents so agree and

the principals so approve?

40. See 1 S

AMUEL WILLISTON, A TREATISE ON THE LAW OF CONTRACTS § 103B (rev. ed.

1936) (stating the classical illusory-promise rule).

41. See, e.g., 2 A

RTHUR L. CORBIN, CORBIN ON CONTRACTS § 5.17 (Joseph M. Perillo ed.,

rev. ed. 1995) (“Consideration is designed primarily to protect promisors from their own donative

promises.”); Melvin Aron Eisenberg, The World of Contract and the World of Gift, 85 CALIF. L. REV.

821 (1997). To put this perhaps more precisely, the wisdom of “consideration” may lie only in its

separation of affective from commercial contexts; beyond that, there is little need to draw rigid

distinctions that rule out commercial expectations from governing. Accordingly, an offer to do an act

conditional on acceptance is really just a unilateral promise to do something that commercial norms

dictate ought to be done on acceptance, given trade customs and the facts of particular circumstances.

Perhaps the acceptance makes the promise enforceable only because the promise was conditioned on

whatever acts constituted acceptance, not because the acceptance adds anything relevant (as

“consideration”) to distinguish the case as a commercial rather than an affective one.

80 CALIFORNIA LAW REVIEW [Vol. 103:67

acceptance from any other kind of event on which a promise’s performance

may be conditioned. “I promise to paint your house if you’ll agree to pay me

$400” should receive the same treatment as Mr. Waterman’s original

document; there is no substantively relevant difference between the two cases.

Indeed, sensitive courts have analyzed contract formation in a way

broadly consistent with what I am suggesting. In Jaybe Construction Co. v.

Beco, Inc.,

for example, the court recognized that a deal that had otherwise

been offered and accepted might be conditioned on a further step, such as

reducing an agreement to writing (presumably, at some later time that could be

identical for both parties).

Similarly, Atlantic Terra Cotta Co. v. Chesapeake

Terra Cotta Co. recognized the possibility that “acceptance [] of an offer”

could be “conditional on the execution of a formal contract” by the parties.

There is little functional reason to avoid such possibilities.

2. Needless Categorization

The prior Section shows ways in which the offer-and-acceptance

paradigm complicates individual cases by obscuring the reasoning process that

is needed to reach functional results. This Section generalizes somewhat in

order to show ways in which the offer-and-acceptance paradigm also

complicates the structure and categorization of contract-law doctrine.

a. A Failure to Generalize: Implied-in-Fact Contracts and Other Similar Cases

For one thing, the offer-and-acceptance paradigm has led to an

unnecessary fragmentation of doctrines concerning formation. As discussed

earlier, many real world contracts are created without any explicit “acceptance”

or “offer-and-acceptance” pattern. For example, if I pass by a newsstand at

which I am a regular customer and familiar with the proprietor, and in a rush I

take a newspaper and nod toward the proprietor, pointing at my watch, the

proprietor and I likely have a contract for the sale of goods on the usual terms

by which we buy and sell daily newspapers.

Modern contract law recognizes

an obligation here, but it does so by treating the interaction as a contract

“implied in fact.” Implied-in-fact contracts have the same legal effects as

express contracts, but they arise differently and do not require an offer or an

acceptance, except perhaps a fictional one. It is unnecessary to create a separate

doctrinal category for these cases instead of recognizing that there is a contract

(like any other contract) simply because the parties would reasonably believe

42. 216 A.2d 208 (Conn. Cir. Ct. 1965).

43. See id. at 211–12.

44. 113 A. 156, 158 (Conn. 1921).

45. This example is a generalization of R

ESTATEMENT (SECOND) OF CONTRACTS § 4 cmt. a,

illus. 2 (1981) (“A, on passing a market, where he has an account, sees a box of apples marked ‘25 cts.

each.’ A picks up an apple, holds it up so that a clerk of the establishment sees the act. The clerk nods,

and A passes on. A has promised to pay twenty-five cents for the apple.”).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 81

under the circumstances that they are obliged to each other on familiar terms.

To put it differently, while International Filter highlights an area where the

offer-and-acceptance doctrine causes the analysis of a class of cases to be more

complicated, the separation of “implied in fact” from ordinary contracts shows

a more general problem of doctrinal complication through unnecessary

classification.

The law of implied-in-fact contracts is not the only doctrine that the offer-

and-acceptance model complicates. As I suggested earlier, any case where there

is a simultaneous, in-person expression of an agreement—a joint signed

statement, an agreement to form many kinds of companies (such as a

partnership or an LLC), and so on—might exhibit no offer-and-acceptance

pattern. The law seems to respond to these factual patterns by simply ignoring

their differences from the standard offer-and-acceptance model. Because

questions of offer and acceptance rarely arise in these cases, courts have likely

had little reason to consider the question carefully. But courts do of course

acknowledge that assent can be concurrent rather than sequential, and can

involve two parties or more than two parties (in which case the offer-and-

acceptance model becomes cumbersome very quickly).

The case of business-

organization agreements is interesting for a related reason: they often, by their

presence, give rise to a broader change in legal status among the parties. It is

fine to say that such changes have nothing to do with the essence of “contract

law,” but that sort of essentialism creates legal categories that are justified only

by circular reasoning. In other words, it seems better to say simply that by

agreeing to co-own a business, parties agree to other rights and duties as a

result of their circumstances. This agreement is not fictional, but it may not

come from anything related to classical “offer” or classical “acceptance.” It

comes from the reasonable expectations of the parties.

b. The Search for False Certainty

The offer-and-acceptance paradigm also neglects alternative modes of

contract formation, often in the name of legal certainty. It is not even clear,

however, that the typical case of contract formation in fact involves an offer

followed by an acceptance. Communications called “offers” are not rare, but

often what they offer is a price, or some other term—not a contract. The

contract comes into being only through a series of increasingly certain cues, or

from the development of business circumstances, such as in cases where courts

hold that a contract exists because of “acceptance by conduct.”

46. See, e.g., Virginia v. West Virginia, 78 U.S. 39, 63 (1871) (Davis, J., dissenting)

(discussing a multiparty interstate compact and referring to “a reciprocal and concurrent consent of the

three parties to the contract”).

47. See, e.g., Polaroid Corp. v. Rollins Envtl. Serv. (NJ), Inc., 624 N.E.2d 959 (Mass. 1993).

And, of course, promissory estoppel in general follows no offer-and-acceptance pattern.

82 CALIFORNIA LAW REVIEW [Vol. 103:67

On reflection, several salient alternatives to the classical offer-and-

acceptance paradigm emerge. In one type of case, we are confident an

agreement arises from a muddle of events, but we cannot say how—nor is it

necessarily important to do so.

For an extreme example of this, consider

comedian Alun Cochrane’s assertion that his marriage proposal was never

explicit and simply matured naturally during ordinary conversation: “I never

had a proposal. Our marriage is honestly a conversation that got out of

hand. . . . We were just having a chat; my wife was washing up, and then we

were booking a wedding.”

As a matter of casual empiricism, this pattern is

not unusual or problematic (except, of course, for marriage proposals!). Parties

often do not have the rules of contract law specifically in mind in their

interactions; those interactions proceed informally, reaching at some point a

threshold past which it is clear to the parties (if they are reasonable) that they

are bound. Parties will never have absolute certainty that they have reached an

agreement; what they need is reasonable confidence. The distinction between

absolute certainty and reasonable confidence (and between legal certainty and

practical certainty) is not appreciated enough; legal rhetoric often emphasizes

the former, forgetting that it is unattainable and that moving toward it is not

desirable in all contexts.

The opinion in Adams v. Lindsell,

famous for originating the “mailbox

rule” in contract law,

presciently anticipated a problem in seeking certainty in

contract formation. That problem was later formalized in the informational

theory underlying modern computer networking. The court in Adams adopted

the mailbox rule essentially to accelerate contract formation, admitting that

such a rule might lead to some uncertainty for parties but recognizing that

absolute certainty in reaching an agreement is impossible to achieve using an

unreliable communicative technology:

[T]he Court said, that if [we required each party to be confident that

the other party had received its communication before finding an

enforceable contract], no contract could ever be completed by the post.

For if the defendants were not bound by their offer when accepted by

the plaintiffs till the answer was received, then the plaintiffs ought not

to be bound till after they had received the notification that the

48. This is roughly a contractual analogue to the notion of res ipsa loquitur in tort law: we may

know there is a contract but be unable to say precisely how it arose, just as in res ipsa cases, we may

know there was negligence but may be unable to specify precisely what it was. See R

ESTATEMENT

(SECOND) OF TORTS § 328D (1965) (summarizing the tort doctrine of res ipsa loquitur).

49. Frank Skinner’s Opinionated (BBC television broadcast Nov. 17, 2011).

50. See Shawn J. Bayern, Against Certainty, 41 H

OFSTRA L. REV. 53 (2012).

51. (1818) 106 Eng. Rep. 250 (K.B.).

52. See R

ESTATEMENT (SECOND) OF CONTRACTS § 63(a) (1981) (“[A]n

acceptance . . . completes the manifestation of mutual assent as soon as put out of the offeree’s

possession. . . .”); id. at § 63 cmt. a (calling this the “mailbox rule”).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 83

defendants had received their answer and assented to it. And so it

might go on ad infinitum.

A century and a half later, this intuition was proven as a matter of

epistemic logic (the logic of knowledge and belief) and computer networking

theory.

Mathematicians and network theorists know this pattern of

communicative fragility as the “Two Generals Problem.”

In the scenario

usually discussed,

two allied generals are located at a distance from each

other and can communicate about their readiness for an attack only over an

unreliable medium, like carrier pigeons that might be shot down or otherwise

fail to reach their destination. Their military strategy requires them to attack a

common enemy either together or not at all. The question is whether, under

these conditions, they can ever mount an attack. If absolute certainty in

agreement is required, the answer—as the Adams court saw—is that they

cannot. The first general cannot attack until she sends the second general a

message and confirms that it has been received; the second general cannot

attack until he receives the message, writes an acknowledgment, sends it, and

confirms that the acknowledgement has been received. The first general knows

this, so she sends an acknowledgement that the second general’s confirmation

has been received, but must wait for that notice to be confirmed, and so on. Of

course, in the real world, the generals can reach various levels of practical

confidence,

but they cannot reach absolute certainty. Thus, unless they want

to rule out all possibility of a coordinated attack, they must take at least some

risk that they might not attack together.

In most business settings, identifying a point past which contracting

parties will have sufficient confidence probably has little to do with identifying

a particular “acceptance” or the offer that preceded it. The exception to this

muddle is the classic case of contracts concluded at a distance with significant

delays, usually through the mail—where the communication is punctuated and

can, in its entirety, be reconstructed. The “mailbox rule,” or any number of

similar plausible candidates for an alternate rule, serves a useful coordinating

function in those environments. But those cases are of sharply diminished

importance in the modern commercial world. As I discuss further in Part III

infra, artificially constructing a single definite “acceptance” out of a verbal

53. Adams v. Lindsell, (1818) 106 Eng. Rep. 250 (K.B.).

54. See E.A. Akkoyunlu et al., Some Constraints and Tradeoffs in the Design of Network

Communications, in SOSP

’75, PROCEEDINGS OF THE FIFTH ACM SYMPOSIUM ON OPERATING

SYSTEMS PRINCIPLES 67, 70 (J.C. Browne & Juan Rodriguez-Rosell eds., 1975) (“In an arbitrary

distributed facility, it is impossible to provide complete status.”).

55. See Jim Gray, Notes on Data Base Operating Systems, in L

ECTURE NOTES IN COMPUTER

SCIENCE: OPERATING SYSTEMS 393, 465–66 (R. Bayer et al. eds., 1978).

56. See id.; see also E

CONOMICS AND INFORMATION 57 (Pascal Petit ed., 2001); Eric Pacuit &

Rohit Parikh, Reasoning About Communication Graphs, in I

NTERACTIVE LOGIC 135, 148 (Johan van

Benthem et al. eds., 2007).

57. See generally Pacuit & Parikh, supra note 56.

84 CALIFORNIA LAW REVIEW [Vol. 103:67

conversation requires, at best, the construction of a useless fiction; at worst, it

leads to problematic results.

Similarly, parties don’t just engage each other informally, without

knowledge of contract law; they also often talk in ways that misuse the

terminology of contract law and probably cannot be formally mapped onto its

substance. For example, in refinancing a mortgage recently, my lender wrote to

me of its “counter offer letter, which you’ve already accepted.”

It probably

did this just because it wanted its file to match what we had already

substantively agreed to elsewhere. As a related matter, it is also common to see

agreements that describe themselves as occurring “in one or more counterparts,

each of which are originals and all of which constitute a binding agreement.”

Analyzing such documents from the perspective of the reductive offer-and-

acceptance model would serve no purpose. In these situations, as in the others I

have discussed, analyzing whether at least one of the parties reasonably thinks

there is a binding contract would better track the parties’ goals, as well as the

moral and policy objectives that the law seeks to implement by legally

enforcing the parties’ promises.

B. Potentially Poor Results

In addition to needlessly complicating contract formation, the offer-and-

acceptance doctrine also leads to potentially poor results as the paradigm is

stretched. The concern is that applying the paradigm leads to decisions ill-

considered on substantive grounds. The offer-and-acceptance model threatens

to do more harm than good if we use it to decide difficult cases.

An interesting test case involves definite and concurring offers that cross

each other in the mail (or any similar mechanism for delayed communication).

For example, suppose I write you (presumably after some preliminary

discussions) an e-mail offering to sell you my car for $12,000 and you, at

roughly the same time, write me an e-mail offering to buy it for the same price.

We both then read the crossed e-mails. In such a case, there is no traditional

sequence of “offer and acceptance”; the question is whether courts should

enforce a contract between the parties. Though this case has very rarely been

litigated,

most commentators tend to assume that there should be no

58. E-mail from Tami Rice, Pentagon Fed. Credit Union, to Shawn Bayern (Nov. 23, 2011)

(on file with author).

59. As an analogy, consider Stephen Sugarman’s similar type of arguments against the

“assumption of risk” doctrine in tort law. See Stephen D. Sugarman, Assumption of Risk, 31 V

AL. U. L.

REV. 833, 835 (1997) (“My argument here is something of a mixed positive and normative one. On the

one hand, I offer what I believe to be a parsimonious explanation for most of the existing cases, one

that rejects ‘assumption of risk’ as both superfluous and unilluminating of the real reason for the result.

On the other hand, by offering a better way of thinking about the cases, my analysis helps correct the

mistakes that I believe some courts have made.”).

60. See R

ESTATEMENT (SECOND) OF CONTRACTS § 23 cmt. d (1981) (“Cases have occurred in

which identical offers have crossed in the mails. Such an event is unusual . . . .”).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 85

enforceable contract—although they rarely justify that position on substantive

grounds. The formal grounds are somewhat clear: in addition to potential

problems with consideration (one offer is not given in exchange for another),

there has been no classical sequence of offer followed by acceptance. As usual,

this formal analysis has obscured the underlying substantive questions.

It is worth a small detour to examine the origins of the classical, formal

analysis of this question. That analysis is particularly thin in this area, both

doctrinally and substantively; that is, there is almost no case law on the matter.

The relevant case law that does exist is nonetheless commonly taken as

authoritative even though little attempt has been made to justify the rule on

social or business-related grounds.

The doctrine that “cross-offers” are necessarily unenforceable dates to

(and largely rests on) a single English case, Tinn v. Hoffman & Co.

This case

appears to have resolved the matter for England and the Commonwealth in

dicta,

and it is ordinarily the only doctrinal authority for the few American

sources that consider the question.

The only reason that the judges in Tinn

seem to provide in holding that no contract is formed is that there is no clear

way to construct “offer and acceptance” from identical offers that cross each

other in the mail. If that indeed is what motivated their thinking (and little else

is apparent), the case serves as an excellent example of the potential problems

in applying the offer-and-acceptance doctrine mechanically.

The precise reason for the rarity is unclear. Perhaps substantially identical offers rarely cross each

other in the first place, but such a phenomenon doesn’t seem obviously more obscure than similar

problems that have arisen frequently (like revocations that cross acceptances in the mail). Charles

Fried, one of the few American writers to address the problem squarely, calls it “largely theoretical”

because parties facing the problem “would immediately pick up the telephone to straighten out the

confusion.” C

HARLES FRIED, CONTRACT AS PROMISE 54 (1981). But Fried’s supposition seems

unconvincing. On one hand, it would prove too much because it would apply to most other problems

of transacting at a distance, some of which have persisted alongside telephones. On the other, it is not

correct to assume that in all circumstances of crossed offers, parties necessarily think there is

something to clarify. As a rough example, if I receive a message from an associate dean saying “I’m

adjusting the fall schedule; would you mind moving your class to 3:00?” at roughly the same time as

I’ve written an e-mail that reads “Actually, I’ve noticed a conflict; could you move my class to 3:00

instead of 2:00?” then the dean would likely reasonably think she could simply adjust the schedule

without further confirmation. To put it differently, I would probably be unreasonable to object later

that the class was moved without any agreement to move it. Consider, also, the sorts of cases I discuss

at infra text accompanying note 69.

Moreover, even if Fried is correct as a matter of fact, his remark potentially puts the cart before

the horse if the question is what the best rule of contract law would be: parties surely wouldn’t think

they needed to follow up with one another if contract law made enforcement in such cases clear. Cf.

infra note 70 and accompanying text. Even more fundamentally, even if Fried’s assumption about the

parties is correct, it suggests a substantive rather than formal analysis of the case; I have no objection

to courts’ refusing to enforce crossed offers if the parties do not expect them to do so.

61. [1873] 29 L.T. 271 (Ex. Ch.).

62. See M

INDY CHEN-WISHART, CONTRACT LAW § 2.3.2, at 65 (4th ed. 2012) (citing Tinn but

giving no new substantive justification).

63. See, e.g., E.

ALLAN FARNSWORTH, CONTRACTS § 2.10, at 107 (4th ed. 2004).

86 CALIFORNIA LAW REVIEW [Vol. 103:67

In Tinn, one judge in the majority wrote simply that “you cannot make [a

contract] by cross offers, and say that the contract was made by one party

accepting the offer which was made to him.”

Judge Blackburn added, “I do

not think exchanging offers would, upon principle, be at all the same thing” as

an offer followed by an acceptance, but he never suggested what the

“principle” was or whether it would be desirable on any substantive grounds.

His one attempt at a functional justification was to hint that it would cause

“grave inconvenience” to change the rules despite observing just a few

sentences earlier in his opinion: “There is, I believe, a total absence of authority

on the point. I do not think, though I am not sure, that the question has ever

been raised before.”

Notably, one judge in Tinn disagreed with the others. Judge Honyman

wrote:

I cannot see why the fact of the letters crossing each other should

prevent their making a good contract. If I say I am willing to buy a

man’s house on certain terms, and he at the same moment says that he

is willing to sell it, and these two letters are posted so that they are

irrevocable with respect to the writers, why should not that constitute a

good contract?

The best way to answer the question raised in crossed-offer cases is

simply, in my view, to apply the same general principle that I have already

outlined: Does one of the parties reasonably think there is a contract, or do both

of the parties subjectively think there is a contract? The Restatement Second is

not far from this position, at least in its comments. In explaining why crossed

offers should not form a contract, it claims that “the ordinary offer does not

manifest assent to the formation of a contract in this way.” If the Restatement

means by this that parties do not ordinarily intend to be bound if their offers

cross, that is at least a potentially valuable (and perhaps decisive) substantive

reason that courts should not determine that an enforceable contract results

from crossed offers.

To put it differently, the question should not be whether an acceptance

followed an offer or whether an offer induced an acceptance. In order to

achieve the substantive goals of contract law, the question of contract formation

should simply be an interpretive one,

grounded in the parties’ intent and

expectations.

64. Tinn, 29 L.T. at 278. (Brett, J.).

65. Id.

66. Id. at 279 (Blackburn, J.).

67. Id. at 275 (Honyman, J.).

68. Cf. R

ESTATEMENT (SECOND) OF CONTRACTS § 23 cmt. d (“This is a matter of

interpretation; theoretically, just as the offeror may assent in advance to an acceptance, so each of two

offerors could assent in advance to a cross-offer.”).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 87

Suppose two people agree simultaneously to a contract in person. They

might do this with, for example, quickly exchanged words. In environments

where it makes sense, like among contracting parties who know each other well

or who share the norms of a quick and hectic marketplace or a professional

auction, they might do it with mere glances or hand gestures. Particularly if

they then simultaneously shake hands or perform some other joint act, there

should be little doubt that the parties have formed an enforceable contract. In

the general case, it is unclear why the substantively unimportant lack of literal

simultaneity in the crossed-offer cases, where the parties use methods of

delayed communication, ought to change that result. The lack of simultaneity

does not inherently cause the parties to behave differently, or to have different

expectations, from those in cases of in-person simultaneity.

More directly, as a general matter, there are substantive advantages to

accelerating the formation of contracts in ambiguous cases where it is

nonetheless clear that the parties agree on relevant terms. Most importantly, if

the parties agree or are likely to agree, accelerating formation generally

promotes potentially beneficial reliance by one or both of the parties. For

example, someone planning to sell a car can be more confident in taking steps

to execute the sale, or a factory manufacturing an item can begin production

earlier. A rule that makes enforcement clear in crossed-offer cases would also

probably cut down on the costs of contracting for the parties; it would eliminate

the need for the parties to follow up with further e-mails or more direct

communication. Similarly, it could discourage the parties from continuing to

bargain over terms when further bargaining would likely do nothing other than

reallocate the existing contractual surplus (that is, the gains from the contract).

Moreover, in at least some cases of crossed offers, there may be additional

moral reasons for enforcement. If the offers are framed explicitly as conditional

promises, it is probably wrongful for a party to insist that no contract is formed.

Suppose parties exchange e-mails that say, “If you’re willing, I promise to enter

the joint venture that we discussed.” Framed as a moral commitment, such

communications probably carry moral obligations, and social morality is one

significant pillar of contract law.

69. For a recent discussion of the interplay of morality and efficiency in contract law, see

Melvin A. Eisenberg, Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the

Indifference Principle in Contract Law, 93

CALIF. L. REV. 975, 1012 (2005) (“[T]he efficiency of the

contracting system rests on a tripod whose legs are legal remedies, reputational effects, and the

internalization of social norms, in particular the moral norm of promise-keeping.”).

Melvin Eisenberg has defined social morality as follows:

By social morality, I mean moral standards that claim to be rooted in aspirations that apply

to all members of the community and, on the basis of an appropriate methodology, can

fairly be said to have substantial support in the community or can be derived from norms

that have such support. In contrast, critical morality consists of moral standards whose truth

does not depend on community beliefs and attitudes, except insofar as such beliefs and

attitudes are relevant to the application of the moral standards.

Melvin A. Eisenberg, Disclosure in Contract Law, 91 C

ALIF. L. REV. 1645, 1651 n.5 (2003).

88 CALIFORNIA LAW REVIEW [Vol. 103:67

It is worth noting that my contention is not that all cross-offers should

create enforceable contracts; the touchstone should simply be (as usual in

modern contract law) the parties’ expectations, and divining such expectations

is fundamentally an interpretive question not easily reduced to formulas. An

interesting difficulty arises here, one that has been insufficiently explored in

contract literature in general: What is to be done when suboptimal law has

influenced parties’ expectations in a counterproductive way? That is, what if

parties expect that cross-offers don’t form enforceable contracts merely

because the doctrine (thin as it is) has suggested that they don’t? There is

unlikely to be a comprehensive, general answer to that question; the best

response will depend on the strength of the underlying expectations, the

benefits to be gained by changing them, and the likelihood that the law could

change people’s expectations in the first place.

The few commentators to suggest a less richly substantive or interpretive

analysis of the problem rarely give reasons for such a view. As in Tinn, the

typical reason is often purely formalistic. The Restatement Second suggests an

analysis similar to mine, with perhaps a thumb on the scale, as an interpretive

matter, against enforceability.

Interestingly, the civil-law tradition appears to

reach a similar result for similar reasons to those I have proposed; at least, a

Louisiana court, applying civil law, has noted that cross-offers form a contract

under the civil law “because (1) there is a concurrence of wills and (2) the law

favors the formation of contracts.”

Similarly, Arthur Corbin reached the right

70. Mark Gergen has helpfully suggested in conversation that an additional reason not to

enforce cross-offers is that they do not exhibit the sort of mutual understanding that contracts

ordinarily exhibit, where each party knows that the other intended to form a contract. For example,

Thomas Scanlon outlines a principle under which contracts should be enforced when, among other

things, “A acts with the aim of providing . . . assurance, and has good reason to believe that he or she

has done so,” “B knows that A has the beliefs and intentions just described,” “A intends for B to know

this, and knows that B does know it,” and “B knows that A has this knowledge and intent.” Thomas

M. Scanlon, Promises and Practices, 19 P

HIL. & PUB. AFF. 199, 208 (1990). Cross-offers arguably

lack this distinctive type of agreement. They may, however, still meet Scanlon’s principle, at least as

much as ordinary cases concluded over delayed communication do, for in many such cases parties

may not literally have simultaneous intentions. More importantly, even if cross-offers lack the sort of

agreement that Scanlon describes, I am not confident that is a sufficient basis for refusing to enforce

obligations that result from them. They may be exceptional sorts of obligations, and perhaps they do

not deserve to be called contracts, but the classification of them for these purposes should not affect the

functional discussion in the text.

71. See RESTATEMENT (SECOND) OF CONTRACTS § 23 cmt. d.

72. Spiers v. Seal, 426 So. 2d 631, 634 (La. Ct. App. 1982). Much European commentary

appears consistent with this position. See Joseph M. Perillo, Book Review, 37 F

ORDHAM L. REV. 144,

149 (1968) (reviewing 1 & 2 F

ORMATION OF CONTRACTS: A STUDY OF THE COMMON CORE OF

LEGAL SYSTEMS (Rudolph B. Schlesinger ed., 1968)) (referring to “respectable arguments for

[forming contracts based on crossed offers] among German, Swiss and Austrian writers”). As

Professor Perillo nicely observes, “If the parties have manifested assent to the same terms and, at least,

if this manifestation arises out of on-going negotiations, what need is there to impose the additional

requirement that there be an offer and acceptance?” Id. Note that the continuation of ongoing

negotiations that Professor Perillo mentions may be one feature of contracting context that a case-by-

case analysis would illuminate.

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 89

sort of substantive analysis by rejecting an overly formal dependence on the

notion of an acceptance. “There is,” he wrote, “no inevitable necessity in our

adoption of the machinery of offer and acceptance. The rules of contract, like

all other rules of law, are based upon mere matters of policy, or belief as to

policy.”

Charles Fried has defended the classical view of crossed offers on both

formalistic and administrative grounds. He posits two letters sent on Monday

that cross one another in the mail and arrive on Wednesday for both parties.

Noting that “it seems most natural to me to say that there is no contract,”

concludes that “what was not an acceptance nor intended as one on Monday

cannot turn into an acceptance on Wednesday.”

So far, that is a purely formal

conclusion, and it is hard to see why it should be persuasive. But Fried

continues to suggest an essentially administrative problem with enforcement of

contracts created by crossed offers: “Consider the inconveniences of a rule

holding that a contract concluded on Wednesday. Neither A nor B knows that

the other is in receipt of his letter, so the circumstances that would create the

contract are not known to either party.”

Fried later undercuts this argument,

however, by admitting that the parties both “showed themselves willing to take

the risk of being contractually bound without knowing it” merely by sending an

offer that could have been accepted.

Ultimately, he rests his position on an

assertion of intuition, much like the most generous interpretation of Judge

Blackburn in Tinn: finding an enforceable contract “would at least require the

promulgation of a rule to that effect, for the result lacks the intuitive naturalness

of the standard offer-and-acceptance case.”

This argument from intuition,

however, is problematic for at least two reasons. First, it amounts to little more

than traditionalism in form—to a general assertion, ironically contrary to the

tradition of the common law, that judges cannot or should not change the law.

Second, it assumes that business parties are familiar with the details of the

offer-and-acceptance paradigm; this is probably not true in general, and it is

particularly doubtful when there is apparently little more than one case in favor

of the proposition in all of Anglo-American contract law’s history—an English

case dating to the late 1800s.

73. Arthur L. Corbin, Offer and Acceptance, and Some of the Resulting Legal Relations, 26

YALE L.J. 169, 183 (1917); see also K. N. Llewellyn, On Our Case-Law of Contract: Offer and

Acceptance, I, 48 Y

ALE L.J. 1 (1938); K. N. Llewellyn, Our Case-Law of Contract: Offer and

Acceptance, II, 48 Y

ALE L.J. 779 (1939).

74. F

RIED, supra note 60, at 53.

75. Id.

76. Id.

77. Id. at 54.

78. Id.

79. An old contract-law treatise, W

ILLIAM HERBERT PAGE, THE LAW OF CONTRACTS § 151,

at 224 (2d ed. 1920), cites what appears to be a second case on the matter, an obscure unpublished

opinion from Kentucky that touches only briefly on the question without providing any substantive

reasoning. Oddly, the treatise appears to cite the case incorrectly; the unpublished case can be found at

90 CALIFORNIA LAW REVIEW [Vol. 103:67

III.

OVING BEYOND OFFER AND ACCEPTANCE

This Part makes two related arguments. The first is somewhat more

radical than the discussion of Part II; it is that in focusing excessively on a

moment of contract formation, the offer-and-acceptance doctrine wrongly

suggests that we can determine whether contracts exist solely from a putative

acceptance and information that precedes it. Instead, my argument is that

information subsequent to classical acceptances can and should influence

contract formation. Related, but much more radical, my second argument is that

contract formation should simply not be seen as necessarily irreversible in most

cases; instead, contract law should, for reasons of morality and efficiency,

adopt a new theory more consciously tied to the purposes of expectation

damages in the first place. On this view, it is not words or agreements that

alone cause a contract to be formed. Rather, those words and those agreements

interact with the parties’ ongoing circumstances, and the precise moment of

appropriate contract formation may ultimately have nothing to do with the

agreements the parties exchanged but rather with other circumstances that arise

later in their dealings. Perhaps ironically, such a theory could also offer the

parties better certainty as to the precise timing of contract formation than the

current offer-and-acceptance model.

A. Conversation Plus: Putting Dialogue in Its Place

Historically, the doctrine of offer and acceptance led to odd and

unjustifiable results when applied with the superficial analytical rigor of

classical contract law. For example, under classical contract law, an offer of a

unilateral contract (“I’ll pay you $100 if you paint my house”) could not be

accepted by partial performance of the invited act (painting most of the house)

even though the painter would clearly believe himself to have a right to be paid

by the offeror.

That doctrinal error has been corrected,

but a potentially significant

remaining problem is that the offer-and-acceptance doctrine tries to maintain

that communication leading up to a putative offer or acceptance is sufficient

(coupled with the candidate offer or acceptance in question) to determine its

legal status. Consider the following hypothetical dialogue between an artist at

an art festival and a potential buyer:

1. B: “I’d like to buy your painting for $500.”

Ratterman v. Campbell, 26 Ky. L. Rptr. 173 (1904). For its part, the Page treatise states simply “cross-

offers do not constitute a contract” without attempting a justification. PAGE, supra, at 224. There is

arguably contrary American authority as well. See, e.g., Morris Asinof & Sons, Inc. v. Freudenthal,

186 N.Y.S. 383 (N.Y. App. Div. 1921) (referenced in Perillo, supra note 72).

80. See Peter Meijes Tiersma, Reassessing Unilateral Contracts: The Role of Offer,

Acceptance and Promise, 26 U.C.

DAVIS L. REV. 1 (1992).

81. R

ESTATEMENT (SECOND) OF CONTRACTS § 45 (1981).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 91

2. S: “Agreed.”

3. B: “Do you take credit cards?”

4. S: “No.”

5. B: “Oh, sorry, then I have no way to pay.”

A classical contract theorist—and, too often, those who write Contracts

exams—may conclude that we can determine for certain at step 2 (or, perhaps

more precisely, immediately upon the completion of step 2) in the dialogue that

there is a contract. Maybe he or she would pick some other stage of the

dialogue. Regardless of the particular step such a theorist would decide sets

forever the parties’ legal obligations to each other, my concern is that the

question is the wrong one to be asking. It is only after considering what is later

said that we can know whether the parties intended after step 2 to be bound; it

is simply not the case, I think, that we want only the communications and acts

up to a certain time to matter in determining the presence of a contract at that

time.

Now, perhaps steps 3 through 5 matter only as interpretive clues; that is,

perhaps they affect our determination about whether there is a contract after

step 2 by giving a factfinder greater information about what statements 1 and 2

meant at the time they were uttered. My contention is that the problem is

deeper, however, and that what is said after step 2 can actually cause what

would otherwise have been a contract to evaporate. It is not that a right or duty

arose upon step 2 and was later removed because of some sort of excuse to

performance (in this case, perhaps something like impracticability under the

circumstances); it is that statement 2, no matter how unequivocal an acceptance

in form, simply does not alone provide a mechanism for a contract to be

formed. For example, statement 2 might read “You have a deal; I am very

pleased to sell it to you at that price and will begin to pack up the painting

immediately.” Nonetheless, it would not necessarily create a contract, even if

statement 1’s status as a classical offer is similarly strengthened, perhaps along

the lines of “I propose a contract for the sale of your painting and will purchase

it for $500 if you agree.”

My contention may amount to little more than a simple recognition that it

is not an utterance like that in step 2, but rather that utterance combined with

something more (even if just a subsequent period of silence) that serves as an

acceptance. But that recognition alone suggests that an analysis of contract

formation should focus more on a course of conduct as a whole rather than on a

specific hypothetical moment of contract formation.

Consider what has become the standard practice for online retail

commerce: customers add items to a virtual “shopping cart” or “shopping

basket” and then “check out,” supplying payment information.

Even then, it’s

unclear whether a sale has been completed; many organizations provide

82. See generally ZHENG QIN, INTRODUCTION TO E-COMMERCE (2009).

92 CALIFORNIA LAW REVIEW [Vol. 103:67

opportunities to cancel (and have “terms” posted on the site that purport to

provide such a cancellation as a matter of right to customers) after the final

check-out. Many airlines, for example, provide the opportunity to cancel even

“nonrefundable” tickets up to 24 hours after purchase; it is unclear whether

most consumers know of this or not, but I suspect they don’t.

Sometimes,

buttons on a website are labeled “confirm” but do not themselves trigger what

is legally an acceptance; that is, often even terminology that suggests finality

does not in practice lead to finality. General expectations of customers seem to

be something like the following: they continue interacting with a website until

it gives a final confirmation, with indicia of confirmation that have become

familiar (an order number, an e-mail confirmation). Even then, there may well

be legitimate and appropriately enforceable expectations that one side, or both,

can cancel the order upon subsequent contact in a reasonable amount of time

(say, a few minutes, and in many situations perhaps longer). Perhaps in many

cases consumers expect to be able to refuse to accept a shipment of goods from

a website, and thus to avoid payment.

Overall, there is a spectrum rather than a binary, on-off mechanism: at

some point, the transaction runs its course, and both sides’ attention returns to

other things. It is only at that point, often, that we can evaluate whether a

contract has been made. That evaluation has little to do with one particular

offer and one particular acceptance.

B. Acceptance and Irreversibility: Tying Contract Formation to the Purposes

of Contract Remedies

The discussion so far points the way toward what may be a further-

reaching reconsideration of contract doctrine—specifically, a questioning of the

assumption that contracts are generally irreversible and that expectation

damages are fully available a moment after the formation of a contract. Other

than tradition and administrative simplicity, it is unclear what justifies this

rule—and even those two bases seem relatively weak here. The “tradition” is

just a tradition among lawyers and has no necessary direct bearing on the way

that contracting parties conduct themselves. Most contracting parties probably

don’t rely on it, particularly (as we shall see shortly) in cases where so little

time has passed since the putative formation of a contract that reliance is not

even possible. The “administrative simplicity” is itself murky, for it leads

courts to decide potentially unnecessary questions about the precise moment of

contract formation.

83. The Department of Transportation has relatively recently adopted regulations that require a

24-hour refund period for ticket sales in many circumstances. See 14 C.F.R. § 259.5 (2011) (requiring

that airlines publish a policy “allowing reservations to be held at the quoted fare without payment, or

cancelled without penalty, for at least twenty-four hours after the reservation is made if the reservation

is made one week or more prior to a flight’s departure”).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 93

Consider a case where a contract is formed and shortly thereafter, without

any reliance on either side, one of the parties decides the contract was a bad

idea and wishes to cancel its formation. Prior commentary has recognized at

least two ways of treating this scenario: (1) the typical rule of contract law,

enforcing the contract with expectation damages;

(2) a greater emphasis on

reliance damages in contract law in general, and perhaps a limitation of

contract enforcement to that level of damages in these cases (implying no

damages here because there is no reliance).

There is an intermediate course, however. Expectation damages offer

significant advantages in upholding morality and in encouraging efficient

performance of, and reliance on, contracts.

But as I will explain, the benefits

of an expectation-damages regime are unclear where (1) no reliance has yet

been possible, (2) no performance has yet been possible, and (3) no opportunity

for speculation exists that would make rescission unfair. Accordingly, there

seems to be little justification for offering expectation damages in cases where

one party decides shortly after formation, based on an internal reevaluation,

that the contract is a bad idea. Such a reevaluation would not normally provide

the basis for any sort of excuse related to “mistake” or “unexpected

circumstances”; my contention is that rescission should nonetheless be

available.

1. Insufficient Justifications for Enforcement: Immediate Irreversibility and the

Functions of Contract Enforcement

To see why this view of contract formation is both moral and efficient, it

will be helpful to review the reasons for contract enforcement (through

expectation damages) in general. As Melvin Eisenberg and I have previously

explained,

expectation damages broadly serve two instrumental goals: they

encourage efficient rates of performance (along with precaution to prevent

unintentional breach) by promisors, and they encourage efficient reliance by

promisees. As an example of these two benefits, consider a contract for the

manufacture of a custom-built piano for $8,500. Idealized expectation damages

that incorporate the piano’s entire subjective value to the promisee (the buyer)

are necessary for the promisor (the manufacturer) to incorporate into its own

cost-benefit calculus the harm it would cause by failing to deliver the piano as

84. This is, of course, the general doctrinal result. See, e.g., MELVIN A. EISENBERG,

FOUNDATIONAL PRINCIPLES OF CONTRACT LAW (forthcoming 2014) (manuscript at 540) (on file with

author) (“The instant an offer is accepted, each party becomes liable for expectation damages if he fails

to perform, even if he changes his mind only a nanosecond after the contract is formed.”).

85. See L. L. Fuller & William R. Purdue, Jr., The Reliance Interest in Contract Damages: 1,

46 Y

ALE L.J. 52, 52 (1936); see also GRANT GILMORE, THE DEATH OF CONTRACT (Ronald K.L.

Collins ed., 2d ed. 1995).

86. For a detailed exposition of this point, refuting many recent objections to the efficiency of

expectation damages, see generally Bayern & Eisenberg, supra note 10.

87. Id. at 2–8.

94 CALIFORNIA LAW REVIEW [Vol. 103:67

promised.

In doing so, expectation damages encourage efficient performance.

They also, in a closely related way, cause the promisor to take precaution

against accidental breach—such as the piano falling apart a few days after it is

delivered, which would amount to a breach of warranty.

Expectation damages also encourage efficient reliance on the promisee’s

end. Once the contract is made, the promisee can, for example, begin to take

piano lessons knowing that they will pay off in the enjoyment of playing the

purchased piano.

Finally, expectation damages uphold social morality; they comport with

socially moral norms of promise-keeping, and they prevent one party from

taking advantage of another:

We cannot know whether A would have rendered . . . performance to B

for any lesser price. Requiring A to accept any lesser price would

therefore unfairly convert A from a voluntary to an involuntary actor,

because if A had known in advance that the contract price was not

enforceable in full, he might not have agreed and performed.

Expectation damages essentially bolster a bet that the parties have made, and it

would be unfair to let one of them undo that bet subsequently: “[I]n most cases

allowing a promisor to measure damages by anything less than the contract

price would have the same unfair quality as allowing a person who has lost a

fair bet to renege.”

Of course, this analysis is not meant to suggest that it is

morally necessary to enforce promises even when unconscionable, or even

when excused by impossibility or some other factor. The point is just that in the

general case, it is unfair to let a party make a contract and then break it with

impunity without any supervening moral or instrumental justification.

Perhaps surprisingly, these generally accepted reasons in favor of

expectation damages very poorly justify the notion that a contract must be

irreversible immediately after acceptance. Recall that expectation damages

(1) promote efficiency by encouraging efficient performance (and precaution

against unintentional nonperformance), (2) also promote efficiency by enabling

efficient reliance, and (3) are ordinarily consistent with social morality because

they prevent parties from (a) converting others from voluntary into involuntary

actors and (b) reneging on fair bets. None of these reasons supports immediate

irreversibility of contracts.

88. Though the measurement of damages is beyond the scope of this paper, it is worth pointing

out that expectation damages might not, in the real world, achieve this idealized objective; indeed,

depending on how customized the order in the example is, specific performance rather than

expectation damages may be a more suitable remedy. See Eisenberg, Actual and Virtual Specific

Performance, supra note 69, at 999–1003.

89. Cf. Bayern & Eisenberg, supra note 10, at 6–8 (discussing beneficial reliance on

contracts).

90. Id. at 5.

91. E

ISENBERG, supra note 84 (manuscript at 980).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 95

To remain with the example of a custom-ordered piano, suppose the

customer commits to a sale (by signing a document or whatever else is required

under the Statute of Frauds

and all other doctrinal requirements). Suppose

immediately afterwards, he changes his mind—or he receives a call from his

partner, who remarks how bad an idea it would be to buy a custom-ordered

piano for $8,500. A failure to enforce the “contract” that current doctrine

assumes has been made would not undermine any of the goals of expectation

damages: the manufacturer has not had a chance to perform or to take

precautions against unintentional breach, the buyer has not had a chance to rely,

and probably no fair bet has been broken.

The first two of these observations (the instrumental ones) should be

obvious because they are almost matters of definition in the example. The

third—concerning whether a fair bet has been broken—requires more

discussion. Perhaps on some level the buyer has broken a bet he’s made with

the seller—specifically, a bet that he wouldn’t change his mind after agreeing

to the purchase. The seller could, at least theoretically, have offered a price of

$8,500 (rather than some higher price) to cause the buyer to make an impulsive

purchase; the seller thus perhaps risked some lost component of the contractual

surplus in exchange for a more likely inducement to an additional marginal

sale.

This possibility suggests an appropriate fact dependence in determining

whether a purported contract should be treated as irreversible immediately after

it is classically “formed.” On one side of the spectrum, parties may make a

specific financial or psychological bet concerning the certainty of the

transaction. To put it differently, they may specifically intend to allocate the

risk of reversibility to one of the parties. In the real world, pure financial

instruments—futures and options contracts, for example—often carry this

explicit assignment of risk. Note that an attempt to repudiate a futures contract

an instant after it is formed does not necessarily or directly cause a social

deadweight loss, frustrate reliance, or inhibit effective planning. Its primary

problem is that it is unfair given the assignment of risks to which the parties

have agreed. That is, it would allow one party to speculate at the expense of the

other in ways that the parties almost certainly intended (or would have

intended) to prohibit.

Perhaps surprisingly, then, the reason a financial transaction like a stock

sale should be irreversible appears, in the first instance, to be moral. Any

negative instrumental effects proceed, as they often do in contract law,

from

this transactional unfairness in a secondary way: if traders cannot expect stock

92. For example Uniform Commercial Code would ordinarily require that a contract to

purchase an $8,500 piano be memorialized in writing. U.C.C. § 2-201 (2012).

93. Cf. Eisenberg, Actual and Virtual Specific Performance, supra note 69, at 1012 (explaining

how the theory of efficient breach generates inefficiency by undermining the contracting system and

the moral bases on which it partially depends).

96 CALIFORNIA LAW REVIEW [Vol. 103:67

sales or futures contracts to be reliable, they will be less inclined to enter into

them, and as a result a market that is at least provisionally valuable weakens.

On the other side of the spectrum, an ordinary sale of goods in a store

likely does not carry, or need to carry, such a definite assignment of risk—

which is presumably why it is normal for consumers to expect they can return

an unopened, unused good unless told explicitly that “all sales are final.”

It is

possible that in the case of a custom-negotiated sale, the seller indeed has asked

the buyer to accept a risk that the buyer might change his mind (and the buyer

has accepted that risk), but it would be groundless to assume, without more,

that that is the ordinary case.

Accordingly, to be precise, my argument is not that all contracts must be

conditionally reversible; it is that contracts should be provisionally reversible

unless the parties have explicitly or tacitly agreed otherwise.

Putting aside direct, intended shifts of risk, the functional reasons for

expectation damages directly suggest the conditions that should make contracts

irreversible (and the timing of such irreversibility). Once the parties can make

decisions that influence the likelihood of performance, the threat of

enforcement is necessary, and that alone is probably sufficient for contracts to

be treated as irreversible. The same is true of the possibility of decisions made

in reliance on the contract. Once they materialize, the possibilities of

performance and reliance provide sufficient instrumental reasons for treating

contracts as irreversible. To put it differently, the instrumental reasons are

probably sufficient once they arise, particularly because it is not unfair, after

all, to ask parties to do what they promised to do.

There is an additional moral boundary condition, separate from the

instrumental concerns, that ought to trigger irreversible contract formation.

Parties should not be permitted to rescind a contract if it would give them an

opportunity to speculate at the other party’s expense. This opportunity for

speculation ordinarily arises in two ways. First, there is a rapidly changing

market, such as the public stock markets. In such cases, sales ought to be final;

the opportunity to speculate based on small price differences should be

presumed. Second, a party might learn new material information (ordinarily

from some source external to the contracting parties themselves) that would

affect the value of the contract. For example, in the case of the sale of a

custom-made piano, suppose the promisee learns shortly after the sale (but

before reliance or performance are meaningfully possible) that the price of

some component necessary to the manufacture has skyrocketed as the result of

a shortage. Given the normal terms on which people negotiate, it is unfair to

shift that risk after concluding the negotiation. Once the new information is

94. Indeed, it seems likely that given prevailing retail policies at outlets like Target, many

customers expect they can even return undamaged goods once opened, even after a relatively long

interval (like ninety days). See Return Policy, T

ARGET, http://help.target.com/help/subcategoryarticle

?childcat=Return+policy (last visited Oct. 20, 2014).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 97

learned, it becomes morally problematic to let a party reverse the contract

merely because it is no longer desirable to that party. And though expectation

damages would not serve their ordinary instrumental functions of directly

promoting efficient reliance or performance in such cases, enforcement is not

instrumentally problematic. It does not cause a social loss; it simply allocates a

different amount of the contractual surplus to the buyer (or the seller) than he or

she might have hoped.

Accordingly, contracts should be treated as finally formed either when

(1) the instrumental concerns discussed above (the materialization of a

performance or reliance possibility) trigger, or (2) rescission would permit one

party to obtain an advantage through speculation.

Speculation, for these purposes, should be interpreted relatively narrowly.

Merely changing one’s mind does not, on its own, permit non-negotiated

speculation. Relatedly, as I mentioned above, the acquisition of new

information that affects the value of the contract should ordinarily matter only

when it comes from the external world, not the parties themselves. If a party

“learns” new information through introspection and desires to change her mind

accordingly, it is hard to say that permitting her to change her mind is unfair

unless, as I have already discussed, (1) the parties have explicitly assigned the

risk of that “evaluative” mistake to one of the parties;

or (2) there is some

instrumental reason to do so, such as the reasons behind promoting efficient

performance and reliance. Likewise, if a party learns new information after

classical contract formation from the other party, that reflects merely a

manipulative failure by the other party to disclose relevant information. For

example, it is difficult on moral grounds alone for a car dealer to insist on the

performance of an agreement to purchase a new car if, right after the purchase,

he says to the buyer, “Ha! I’m glad you’ve made this purchase. I didn’t think

you would, because the car is a real clunker, and it’s been through three floods

and a bedbug infestation. I’m surprised you didn’t ask about those things. Too

late now.”

In other words, though it is always possible for parties to choose to assign

special risks in a contract, if the parties have not done so and no other

instrumental reason has yet arisen to support contractual obligations, it is

difficult to see why it is a plausible moral argument that what amounts to moral

fraud should be permitted merely because a victim has already provisionally

fallen for it. Even in cases where parties are permitted to deal sharply with one

95. For more on “evaluative” versus other sorts of mistakes, see generally Melvin A.

Eisenberg, Mistake in Contract Law, 91 C

ALIF. L. REV. 1573, 1577 (2003) (describing “evaluative

mistakes” as arising “when an actor who was capable and well-informed at the time he made a contract

comes to believe that his choice to make the contract was mistaken due to a change in either his

preferences, his subjective valuation of the performances due under the contract, or the objective or

market value of those performances”).

98 CALIFORNIA LAW REVIEW [Vol. 103:67

another for instrumental reasons,

it is hard to see why those instrumental

reasons would independently suffice to require enforcement of a contract

immediately after classical contract formation if they don’t require such

enforcement immediately before contract formation. For example, rules

allowing nondisclosure of material information in contract law are usually

defended in economic terms by those who suggest some type of productive

incentive for discovering new information about the world.

But such

instrumental concerns are not sufficient to lead to obligations without ordinary

contract formation; it is difficult to see why they should do so if the other

instrumental and moral reasons in favor of contract formation do not support

enforcement in a given instance.

A final reason that might be seen to support the classical notion of

irreversible contract formation upon acceptance is that parties supposedly have

a moral duty to keep their promises immediately once they are made. This

proposition, however, seems questionable to me. My own moral intuition is that

someone who says, “I promise to take you out to dinner tomorrow. Oh, wait;

sorry. I can’t,” has not actually made a moral commitment. This example

suggests that the moral obligations associated with promises, like the legal

obligations associated with contracts, don’t really start upon an utterance, but

upon an utterance plus something more (silence, course of conduct, and so

on).

Indeed, often the possibility of performance-related preparations, of

reliance, or of new material knowledge—that is, the same factors that ought to

matter for contract law—seem necessary to trigger the moral commitment

associated with a promise in the first place. A reversal of a promise before such

possibilities materialize may seem fickle, but it is not obviously immoral in all

or even most cases.

2. Affirmative Arguments for Reversibility

So far, my argument has been largely negative: there is no reason, given

the usual goals of contract enforcement through expectation damages or similar

mechanisms, that contracts should necessarily be seen as irreversible. This is

enough at least to lead us to seriously question an otherwise largely

unquestioned feature of classical contract law. But there are also specific,

affirmative reasons to move away from the classical rule. In particular, there

are several reasons to believe a more flexible set of rules concerning formation

would promote greater efficiency than a more temporally static view.

96. See Eisenberg, Disclosure in Contract Law, supra note 69, at 1647 (“[S]ocial morality

indicates that when one party knows a material fact that is relevant to a proposed contractual

transaction, and knows that the other party does not know the fact, nondisclosure normally is sharp

dealing, or a kind of moral fraud. But against all this, in some classes of cases a requirement of

disclosure can lead to inefficiency by decreasing the incentive to invest in the discovery of productive

information.”)

97. See id. at 1664–75.

98. Cf. infra Part III.A (discussing the role of temporal context in dialogue).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 99

Most fundamentally, the economic gains of contract law arise ultimately

from enforcing the parties’ real agreement.

To hold someone to enforceable

obligations immediately upon saying “I accept” would likely be to get the

parties’ intentions wrong, at least in many cases. Specifically, it likely runs

against the grain of commonly accepted prospect theory in behavioral

economics—the familiar notion that losses are psychologically weightier than

gains.

100

Though the psychological findings of prospect theory are often

misunderstood by legal economists and depend on the framing of

transactions

101

(and thus would require greater empirical support for us to draw

specific conclusions from them), it is plausible that when parties wish to

reverse a contract a few minutes after forming it, they will perceive their

inability to do so as a loss, whereas the other party will perceive her lost

expectations merely as a forgone gain.

In any case, the more general point is that where commercial norms may

permit some fluidity, it is counterproductive to insist on a lack of fluidity in

setting the moment of contract formation.

The danger of that lack of fluidity, if parties become aware of it, leads to a

secondary instrumental problem, which is that it will tend to discourage

contracting and to increase the costs of contract negotiation and drafting.

Parties will be more hesitant to enter agreements if they perceive the

agreements as creating duties sharper than those they expected. They might

insist on explicit disclaimers, spend more time reading refund policies

carefully, and so forth. All that is a definite loss; it applies even to cases where

no disagreement ends up arising.

Moreover, the administrative benefits of a regime of irreversible contract

formation are illusory. As is quite common in legal rhetoric,

102

“certainty” is

often an argumentative placeholder without substance. A rule that parties can

opt out of contracts a few minutes after formation in the absence of

performance, reliance, or speculation would not be especially difficult for

courts to administer. In the case of written contracts, for example, it would be

easy to produce a written request for rescission made a few minutes after

classical formation, or to physically strike a signature from the original

document. Indeed, in view of the discussion of Part II, the classical doctrine of

offer and acceptance seems to create needless administrative headaches, and

99. See Shawn J. Bayern, Rational Ignorance, Rational Closed-Mindedness, and Modern

Economic Formalism in Contract Law,

97 CALIF. L. REV. 943, 960 n.53 (2009).

100. Daniel Kahneman & Amos Tversky, Prospect Theory: An Analysis of Decision Under

Risk, 47 E

CONOMETRICA 263 (1979).

101. Cf. Shawn J. Bayern, Comment, Explaining the American Norm Against Litigation, 93

ALIF. L. REV. 1697, 1711 (2005) (“In general, loss aversion reflects the way in which a party

‘frames’ a change in utility, so . . . alternative explanations . . . may be plausible on a theoretical level;

empirical testing would be required to decide which account more accurately describes potential

plaintiffs.”).

102. See generally Bayern, Against Certainty, supra note 50.

100 CALIFORNIA LAW REVIEW [Vol. 103:67

this is not surprising; it requires the determination of a moment of contract

formation when the moment is otherwise ordinarily irrelevant on substantive

grounds.

103

Though the view of acceptance as final is rarely questioned, there is one

area where contract law has adopted a set of rules at least loosely consistent

with what I am proposing. These rules turn out not to be substantively

important in many cases any longer, but their existence suggests that the

fluidity and substantive responsiveness that I am proposing are not

categorically unworkable. In particular, in contracts concluded at a distance

(such as through the mail), a problem sometimes arises when an acceptance by

action is invited and performed but never communicated to the offeror. So, for

example, an offer letter might say “If you loan my brother money, I guarantee

that I’ll pay you back if he doesn’t.”

104

There is a tension in contract law here:

if the recipient of that letter makes a loan, that itself amounts to acceptance, and

a contract is concluded.

105

However, it is unreasonable to expect the offeror to

assume the offer has been accepted if she is not notified of acceptance. The

Restatement Second addressed this problem by treating the offeror’s duty as

“discharged” unless the promisee “exercises reasonable diligence to notify the

offeror of acceptance,” the offeror in fact learns of acceptance through some

other means, or the offer originally indicated that no acceptance would be

required.

106

The Restatement Second’s approach seems broadly reasonable, but note

that it permits a contract to be accepted but then for its duties to evaporate

when there is no reasonable notice of the acceptance. That result ought to be no

less strange to a contract formalist than what I have proposed, which is that a

classically “formed” contract might nonetheless be “unformed” in situations

where a party harmlessly changes her mind.

ONCLUSION

Most of the formalism of classical contract law has thankfully eroded in

favor of a modern contract law responsive to concerns of morality and

policy.

107

One feature of classical law that hasn’t eroded, perhaps because it

seems even more intuitive than the other axioms that were once accepted by

formalist contract-law theorists, is an assumption that contracts require an offer

and an acceptance.

103. The relatively functional, anti-formalist Uniform Commercial Code recognizes as much

when it specifies that “[a]n agreement sufficient to constitute a contract for sale may be found even

though the moment of its making is undetermined.” U.C.C. § 2-204(2) (2002).

104. Cf. R

ESTATEMENT (SECOND) OF CONTRACTS § 54 cmt. d, illus. 5–6 (1981).

105. Id. § 54(1).

106. Id. § 54(2).

107. See generally Melvin Aron Eisenberg, The Emergence of Dynamic Contract Law, 88

ALIF. L. REV. 1743 (2000) (describing the replacement of static, formal rules with dynamic,

substantive rules in contract law over the twentieth century).

2015] OFFER AND ACCEPTANCE IN MODERN CONTRACT LAW 101

That assumption is factually untrue, and the rules that rest on it are

doctrinally confusing and normatively undesirable. Like most of classical

contract law, and like analogously poor doctrines in tort such as “assumption of

risk,”

108

the classical rule covering offer and acceptance should be swept away

in favor of substantive, social concerns.

Most of the changes I have proposed are not radical. For example, there

would be few reverberations throughout contract law from eliminating the

stylized notion of acceptance that appears in the International Filter case and

moving instead toward a more direct substantive inquiry concerning the parties’

expectations.

109

Nor would it shake contract law’s foundations to admit that

some “cross-offers” should form enforceable contracts. Even more broadly, it is

simple prudence—simple application of morality and policy—to recognize that

taking the offer-and-acceptance paradigm too seriously threatens at best

needless work and at worst undesirable results. Contracts arise in a variety of

ways, and it should be no surprise that the modes of formation adopted by the

relatively small community that classical contract theorists envisioned are not

the exclusive modes through which business and other affairs proceed. Courts

should simply ask what parties reasonably think their obligations are, rather

than forcing their interactions into what may not be a natural formality.

110

My further-reaching proposals—that proper contract-formation rules

require greater sensitivity to acts subsequent to acceptance, and that

enforceability should not depend on “formation” alone but on the possibilities

of (1) decisions that affect performance, (2) decisions that affect reliance, and

(3) speculation—are admittedly more radical. Still, as I have explained, they

cannot by definition frustrate reliance, and they would likely not upset

expectations either. Indeed, they would probably track most parties’

expectations better than the existing offer-and-acceptance paradigm. Courts

could manage these changes incrementally if needed, permitting at first

relatively narrow exceptions to classical formation doctrine and eroding the

classical notion that legal rights and duties are altered forever “only a

nanosecond after the contract is formed.”

111

108. Cf. Sugarman, supra note 59.

109. See supra Section II.A.1.

110. For discussion of the notion of “natural formalities,” see Lon L. Fuller, Consideration and

Form, 41 C

OLUM. L. REV. 799 (1941).

111. E

ISENBERG, supra note 84 (manuscript at 540).

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