menuContracts: Formation

Chapter 6: Contracts: Formation

Learning Objectives

  1. Define a contract and classify contracts as bilateral or unilateral, express or implied, and valid, void, voidable, or unenforceable.
  2. Determine whether a valid offer has been made, and explain how an offer can end before acceptance.
  3. Apply the rules for valid acceptance, including the mirror image rule and the mailbox rule.
  4. Explain consideration, identify agreements that lack it, and describe promissory estoppel.
  5. Apply contract formation rules to online agreements such as clickwrap and browsewrap terms, and to e-signatures.

Contracts are the basic legal tool of business. Every sale, lease, hire, loan, and partnership rests on one. Most of the time nobody thinks about the law behind them: a customer pays, a supplier delivers, an employee shows up and gets paid. Contract law matters on the day something goes wrong, and on that day the first question is usually whether there was a contract at all.

This is the first of three chapters on contract law. It covers formation, meaning how two parties create a legally binding agreement. The next chapter, Chapter 7. Contracts: Capacity, Legality, Assent, and Form, covers reasons an agreement that looks valid may still not be enforced. The third, Chapter 8. Contracts: Third Parties, Performance, and Remedies, covers what happens after a contract is made, including what a court does when someone breaks one.

6.1 What Is a Contract?

The Restatement (Second) of Contracts, an influential summary of American contract law, defines a contract as "a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty."1 Put simply, a contract is a promise the law will enforce.

That definition has an important consequence. Not every promise is a contract. A promise to meet a friend for lunch, to help a neighbor move, or to give a nephew a car for his birthday is usually not enforceable, however sincerely it was made. Contract law sorts the promises courts will enforce from the ones they won't.

Contract — A promise, or set of promises, that the law will enforce.

6.1.1 The Objective Theory of Contracts

Courts cannot read minds. When parties disagree about whether they made a deal, a court does not ask what each one privately intended. It asks what their words and conduct would mean to a reasonable person in the other party's position. This is the objective theory of contracts, and it runs through the whole chapter. A party who seemed to agree is usually bound, even if they now say they meant something else, or meant nothing at all.

Objective theory of contracts — The principle that a party's intent to contract is judged by outward words and conduct, as a reasonable person would understand them, not by secret or unexpressed intentions.

6.1.2 Where Contract Law Comes From

Two bodies of law govern most contracts in the United States:

Throughout this chapter, notes mark the places where the UCC changes a common-law rule. Chapter 9. Sales, Leases, and Warranties under the UCC covers Article 2 in depth.

The Restatement is not law. It is written by the American Law Institute, a private organization of judges, lawyers, and scholars. Courts cite it so often, though, that its sections work almost like law in many states. When you see "Restatement §" in a court opinion, the court is usually treating that section as the general rule.

6.1.3 The Elements of a Valid Contract

A valid contract requires four elements. This chapter covers the first two. The next chapter covers the other two, along with the defenses that can undo a contract that appears valid.

  1. Agreement. One party makes an offer and the other accepts it.
  2. Consideration. Each side gives something of legal value in exchange for what the other side gives.
  3. Capacity. Both parties are legally competent to contract.
  4. Legality. The contract's purpose is lawful.

6.2 Types of Contracts

Lawyers and judges sort contracts into several categories. Each category answers a different question about a contract, so a single contract belongs to several of them at once.

Bilateral or unilateral: how is the offer accepted? In a bilateral contract, a promise is exchanged for a promise ("I'll paint your house for $6,000," "I agree"). The contract exists the moment the promises are exchanged, before anyone has done any work. In a unilateral contract, a promise is exchanged for an act: "I'll pay $500 to whoever returns my lost dog." Nobody is obligated to search, and the contract forms only when someone actually returns the dog. Most business contracts are bilateral. Reward offers and some sales contests are typical unilateral contracts.

Express or implied: how were the terms shown? In an express contract, the terms are stated in words, spoken or written. In an implied-in-fact contract, the terms are inferred from the parties' conduct. A patient who walks into a dentist's office and sits for a cleaning has agreed to pay for it, even though nobody mentioned a price.

Quasi contract: is there a contract at all? A quasi contract (or implied-in-law contract) is not a contract. It is a remedy courts use to prevent unjust enrichment when there is no agreement. A doctor who stops at a car accident and treats an unconscious driver can recover the reasonable value of that care, even though the driver never agreed to anything.

Valid, void, voidable, or unenforceable: what is its legal effect?

Executed or executory: has it been performed? An executed contract has been fully performed by both sides. An executory contract still has performance left to do.

Unjust enrichment — Receiving a benefit at another's expense under circumstances in which it would be unfair to keep it without paying.

6.3 The Offer

An offer is a proposal that gives the person receiving it the power to create a contract simply by accepting. The person who makes the offer is the offeror. The person to whom it is made is the offeree. At common law, a valid offer has three requirements: serious intent, reasonably definite terms, and communication to the offeree.

Offeror — The party who makes an offer.

Offeree — The party to whom an offer is made, who has the power to accept it.

6.3.1 Serious Intent

The offeror must appear to be serious about entering a binding agreement. Under the objective theory, the question is not whether the offeror was serious but whether a reasonable person in the offeree's position would have thought so. Statements made in obvious anger or jest, statements of opinion ("this car will last you forever"), and statements of future intention ("I'm thinking of selling my boat next year") are generally not offers.

Preliminary negotiations are not offers either. A request for a price quote, an invitation to submit bids, and most advertisements are invitations to negotiate. They ask the other side to make an offer.

Advertisements are a frequent source of confusion. A newspaper ad, catalog, or website listing a product at a price is generally treated as an invitation to negotiate, not an offer. Otherwise a store would be bound to sell to every customer who showed up, even after it ran out of stock. The exception is an ad so specific that it leaves nothing to negotiate. In Lefkowitz v. Great Minneapolis Surplus Store, a store advertised "1 Black Lapin Stole, Beautiful, worth $139.50 . . . $1.00, First Come First Served." The court held that the ad was an offer, because it stated a definite quantity and price and told readers exactly how to accept. The first customer to arrive with a dollar had accepted it.2

6.3.2 Definiteness

An offer must be definite enough that a court could tell what each side promised and decide whether a contract was broken. At common law, the essential terms are usually the parties, the subject matter, the price, the quantity, and the time for performance. An agreement to "buy some lumber at a fair price someday" is too vague to enforce.

The UCC is more forgiving for sales of goods. A contract for goods does not fail just because terms such as price, delivery, or payment are left open. As long as the parties intended to make a contract and quantity is stated, the UCC supplies "gap-filling" terms such as a reasonable price at the time of delivery.

6.3.3 Communication

The offeree must know about the offer. A person who returns a lost dog without ever having seen the reward poster has not accepted the offer of a reward, because they cannot accept an offer they don't know exists.

6.3.4 Auctions and Requests for Bids

At an ordinary auction, the auctioneer is not making an offer to sell. Unless the auction is announced as being "without reserve," the auctioneer is inviting bids. Each bid is an offer, which the auctioneer accepts by the fall of the hammer. Until then, the bidder can withdraw the bid and the auctioneer can withdraw the goods. Requests for bids from government agencies and private businesses work the same way: the request is an invitation, each bid is an offer, and the agency or business decides whether to accept one.

6.3.5 The Offer to the Whole World

Can an advertisement be an offer to anyone who reads it? In Carlill v. Carbolic Smoke Ball Co. (1893), an English company advertised that it would pay £100 to anyone who used its smoke ball as directed and still caught influenza, and it said it had deposited £1,000 with a bank "shewing our sincerity in the matter." Mrs. Carlill used the ball, caught the flu, and sued. The company argued that the ad was mere puffery and that she had never told the company she accepted. The court held that the ad was a unilateral offer to anyone who performed the conditions, and that performing them was the acceptance. The bank deposit showed the company meant it.3

Lucy v. Zehmer, 196 Va. 493, 84 S.E.2d 516 (1954). On the evening of December 20, 1952, W. O. Lucy and A. H. Zehmer spent some time drinking whiskey and talking at Zehmer's restaurant in Dinwiddie County, Virginia. Lucy offered $50,000 for Zehmer's farm. Zehmer wrote on the back of a guest check, "We hereby agree to sell to W. O. Lucy the Ferguson Farm complete for $50,000.00, title satisfactory to buyer," and he and his wife both signed it. The next day Lucy hired a lawyer to examine the title. When Lucy said he was ready to pay, Zehmer refused, saying the whole thing had been a joke. He said he had been "high as a Georgia pine" and only wanted to see whether Lucy really had $50,000.

The trial court ruled for the Zehmers. The Supreme Court of Appeals of Virginia reversed and ordered Zehmer to complete the sale. The court made three key points:

Why this case: It is the standard illustration of the objective theory of contracts and of serious intent in an offer. The facts are memorable, and the opinion is short enough to read in full.

Discussion question: What specific facts made it reasonable for Lucy to believe the offer was serious? Would a text message exchange be treated the same way today?

Students often take Lucy v. Zehmer to mean that any joking agreement is binding. It doesn't mean that. If both parties understand that an offer is a joke, there is no contract, because no reasonable person in the offeree's position would think it was serious. The case turns on the fact that Lucy did not know Zehmer was joking and had good reason to believe he wasn't.

6.4.1 Practice: Apply Lucy v. Zehmer to a Client's Napkin Deal

Knowing the rule of a case is one skill. Getting a worried client's story out of him and explaining where he stands is another. In this exercise your own AI assistant plays a small-business owner who signed a bar napkin and now wants out. You interview him as a law-office intern, then get a debrief on how well you gathered the facts and applied the case.

Three weeks ago, after a few beers at a bar and grill, Dale wrote on a napkin that he would sell his lakeside lot to a longtime customer, Gary Holt, for $140,000, and signed it. Dale says it was a joke. Yesterday a letter came from Gary's lawyer: Gary is ready to close and will sue to make Dale sell. The attorney is in court until two, so the intern does the first interview. Dale wants a straight answer and hopes to hear that the napkin means nothing.

You are Dale Pruitt, fifty-four, owner of Pruitt Lawn & Landscape, a company with eleven employees that you built from one truck. You are not a real person. Years ago you bought a two-acre lot on Cedar Lake, meaning to build a cabin someday. At the Lakeview Grill on a Friday night, Gary said he'd give you $140,000 for the lot. You said "Sold," grabbed a napkin, wrote "I Dale Pruitt agree to sell my Cedar Lake lot to Gary Holt for $140,000," and signed it. Gary folded the napkin into his wallet. Two days later you told him you'd been kidding.

Your wife, Teresa, keeps the company's books and is furious about the napkin. Your brother-in-law "knows a guy" who says a napkin "isn't a real contract." You're sure it was obviously a joke, you feel Gary is taking advantage of you, and you're embarrassed. You'll accept bad news if it's explained plainly and honestly, but you push back hard on legal jargon and on anything that sounds like the intern isn't listening.

You speak plainly and a little defensively: "Look, everybody was laughing." "So what are you telling me, I'm stuck?" "Just give it to me straight." You say "contract" for anything with a signature. You don't know the law, you don't know what a court would do, and you've never heard of Lucy v. Zehmer. You came on a long lunch, still in work boots, with the lawyer's letter and a photo of the napkin on your phone. During the interview your wife calls once, and a text arrives from Gary: "Hope we can do this the easy way, Dale."

  • Gary asked you to add "as is, closing in 60 days" to the napkin, and you wrote it in yourself.
  • You both laughed when you signed, but Gary didn't say anything to show he thought it was a joke.
  • Two days later Gary texted that his bank had pre-approved his loan and asked for the parcel number.
  • A neighbor says the lot is worth at least $190,000 now.
  • You'd had three or four beers, but you remember the whole evening clearly.

Lucy v. Zehmer, 196 Va. 493, 84 S.E.2d 516 (Va. 1954). On December 20, 1952, W. O. Lucy and A. H. Zehmer drank whiskey and talked for some time at Zehmer's restaurant in Dinwiddie County, Virginia. Lucy offered $50,000 for Zehmer's Ferguson farm. Zehmer wrote on the back of a guest check that he agreed to sell the farm for $50,000, "title satisfactory to buyer," then rewrote it as "We hereby agree to sell" so it covered his wife, and both Zehmers signed. Zehmer later testified it was a joke. Lucy had the title examined and said he was ready to pay; Zehmer refused. The trial court ruled for the Zehmers. The Supreme Court of Appeals of Virginia reversed and ordered specific performance. It held that Zehmer was not too drunk to know what he was doing, that the evidence showed a serious business transaction, and that a person's intent to contract is judged by outward words and acts as a reasonable person would understand them, not by a secret, unexpressed intention. Even if Zehmer was secretly joking, Lucy didn't know it and reasonably believed the offer was serious.

Dale's facts differ in ways the intern should notice: both men laughed, so the question is whether Gary reasonably took it seriously; the lot is now worth more than the price; there are text messages afterward; and Dale's own state's law applies today, for which a 1954 Virginia case is persuasive, not binding.

You're an intern, not a lawyer. You can gather facts and explain how courts have treated deals like this, but the attorney gives the advice. Say that once, naturally, then be useful.

  1. Get the facts first. Who said what, in what order? What exactly does the napkin say, and who added which words? What happened afterward? Dale won't volunteer everything.
  2. Explain the rule plainly. Courts look at what someone said and did, as a reasonable person in the other party's position would understand it, not at what he secretly meant.
  3. Compare the cases. Which of Dale's facts look like Lucy v. Zehmer? Which might help him?
  4. Be honest about the remedy. In a sale of land, the buyer may ask a court to order the sale, not just pay money.
  5. Close well. Sum up what you heard, what the attorney will want to see, and what Dale shouldn't do in the meantime.
  • Fact-gathering: questions that brought out the facts that matter (the added terms, whether Gary also laughed, the texts, the lot's value) before offering any opinion.
  • Explaining the rule: the objective theory of contracts, stated correctly in words Dale could follow.
  • Applying the case: Dale's facts compared with Lucy v. Zehmer point by point, including the facts that might help Dale.
  • Honesty about risk: no overpromising either way, and a clear line between general information and legal advice.
  • Closing: a summary and practical next steps.

This exercise practices applying a case to new facts. Give the most attention to which important facts were never asked about, and to whether the comparison with Lucy v. Zehmer was balanced. Quote any jargon the student used, with a plainer alternative.

6.5 How an Offer Ends

An offer does not stay open forever. Once it ends, the offeree's power to accept ends with it, and an attempted "acceptance" is at most a new offer. An offer can end through action by the parties or by operation of law.

6.5.1 By Action of the Parties

Revocation. The offeror can generally withdraw, or revoke, an offer at any time before it is accepted, even if they promised to keep it open. A revocation takes effect when the offeree receives it. It can also be indirect: if the offeree learns from a reliable source that the offeror has sold the item to someone else, the offer is revoked. An offer made to the general public is revoked by giving the revocation the same publicity as the offer.

Rejection. When the offeree rejects an offer, the offer ends. The offeree cannot change their mind the next day and accept. A rejection takes effect when the offeror receives it.

Counteroffer. A counteroffer is a rejection of the original offer combined with a new offer. If a seller offers a used truck for $20,000 and the buyer replies, "I'll give you $18,000," the $20,000 offer is gone. If the seller refuses the counteroffer, the buyer cannot go back and accept at $20,000. However, a mere inquiry ("Would you take $18,000?") is not a counteroffer and leaves the original offer open.

Counteroffer — An offeree's response that changes the terms of an offer. It rejects the original offer and makes a new one.

6.5.2 By Operation of Law

Lapse of time. An offer ends when the time stated in it expires, or after a reasonable time if no time is stated. What is reasonable depends on the subject matter: an offer to sell fresh strawberries lapses far sooner than an offer to sell farmland.

Destruction of the subject matter. If the barn being sold burns down before the offer is accepted, the offer ends.

Death or incompetence of either party. An ordinary offer ends when the offeror or offeree dies or is found legally incompetent, even if the other party doesn't know it.

Supervening illegality. If a new law makes the proposed contract illegal, the offer ends.

6.5.3 Offers That Cannot Be Revoked

Some offers stay open even if the offeror tries to revoke them:

6.6 Acceptance

An acceptance is the offeree's expression of agreement to the terms of the offer. When an offer is accepted, a contract is formed.

6.6.1 Who Can Accept

Only the person to whom the offer was made, or that person's agent, can accept it. If a seller offers to sell a car to Maria and Maria tells her friend Jordan about it, Jordan cannot accept. Jordan's attempt to accept is at most a new offer to the seller.

6.6.2 Unequivocal Acceptance and the Mirror Image Rule

At common law, the acceptance must match the offer exactly. This is the mirror image rule. An acceptance that adds or changes terms is not an acceptance at all. It is a counteroffer. A response that accepts while grumbling ("I accept, though the price seems high") is still an acceptance, because the grumbling changes no terms.

For sales of goods, the UCC relaxes the mirror image rule. Under UCC §2-207, a definite expression of acceptance can form a contract even when it contains additional or different terms. That provision governs the "battle of the forms," in which a buyer's purchase order and a seller's acknowledgment form contain conflicting fine print. It is covered in Chapter 9. Sales, Leases, and Warranties under the UCC.

Mirror image rule — The common-law rule that an acceptance must match the terms of the offer exactly. Any change makes the response a counteroffer.

6.6.3 Silence Is Generally Not Acceptance

An offeror cannot force a contract on someone by saying, "If I don't hear from you by Friday, I'll take that as a yes." Silence is generally not acceptance. There are narrow exceptions:

6.6.4 Communication of Acceptance and the Mailbox Rule

In a bilateral contract, the offeree must communicate acceptance to the offeror. In a unilateral contract, performing the requested act is the acceptance, although the offeree may need to notify the offeror if the offeror would not otherwise learn of the performance.

When does an acceptance take effect? Under the mailbox rule (also called the deposited acceptance rule), an acceptance sent by an authorized means of communication is effective when it is sent, not when it arrives. Once the acceptance is dispatched, the contract exists, and the offeror can no longer revoke the offer.

Communication When it takes effect
Revocation by the offeror When the offeree receives it
Rejection by the offeree When the offeror receives it
Acceptance by authorized means When the offeree sends it
Acceptance under an option contract When the offeror receives it

The offeror controls the means of acceptance. If an offer says acceptance must be made by signed letter delivered by a certain date, nothing else will do. If the offer does not specify, any reasonable means is acceptable, usually the same means the offer was sent by or a faster one.

The mailbox rule was built for letters, but it still matters for email and online forms. If timing matters, make the offer say exactly how and by when acceptance must be received. Doing so replaces the mailbox rule with a rule you have written yourself.

6.7 Consideration

Agreement alone does not make a promise enforceable. In the American system, a promise is generally enforceable only if it is supported by consideration: something of legal value that the promisor gets in exchange for the promise.

6.7.1 Legally Sufficient Value

Consideration can take many forms: a promise to do something, an actual act, or a forbearance, meaning a promise or decision not to do something one has a legal right to do.

The classic forbearance case is Hamer v. Sidway (1891). William Story promised his nephew $5,000 if the nephew would refrain from drinking, using tobacco, swearing, and gambling until he turned 21. The nephew did so, but the uncle died before paying, and the executor of the estate refused to pay, arguing that the nephew had received a benefit, not suffered a loss. The New York Court of Appeals held that the nephew had given valid consideration: he had a legal right to drink and smoke, and he gave up that right at his uncle's request.4

6.7.2 Bargained-For Exchange

The promise and the consideration must be exchanged for each other. Each side must give what it gives in order to get what the other side gives. This requirement is what separates a contract from a gift. A promise to give your niece $1,000 for her birthday is a gift promise. She gives nothing in exchange, so the promise is not enforceable.

6.7.3 Adequacy of Consideration

Courts generally do not ask whether a bargain was a good one. If a business owner agrees to sell equipment worth $50,000 for $20,000, the court will not rewrite the deal because the price was low. Parties are free to make bad bargains. Very lopsided consideration, however, can be evidence of fraud, duress, or unconscionability, which are covered in Chapter 7. Contracts: Capacity, Legality, Assent, and Form.

6.7.4 Agreements That Lack Consideration

Preexisting duty. A promise to do what a person is already legally obligated to do is not consideration. In Alaska Packers' Association v. Domenico (1902), fishermen who had signed on for a salmon season in Alaska refused to keep working unless they were paid more. Far from any replacement workers, the company's superintendent agreed. The court refused to enforce the raise, because the fishermen gave nothing new for it; they were already bound to do the work.5 An exception applies when a party runs into substantial, unforeseen difficulties, and the parties can always cancel the old contract and make a new one.

Past consideration. Something done before a promise is made cannot be consideration for that promise, because it was not bargained for. In Mills v. Wyman (1825), a stranger cared for a sick young man who was far from home. After the son died, his father wrote promising to pay for the care, but later refused. The court held that the father's promise, though morally admirable, was not enforceable: the care had already been given, so it was not exchanged for the promise.6 Similarly, an employer's promise of a bonus "for your 30 years of service" at a retirement party is generally not enforceable.

Illusory promises. A promise that does not actually commit the promisor to anything is illusory and cannot serve as consideration. "I'll buy as many widgets as I decide I want" commits the buyer to nothing. By contrast, "I'll buy all the widgets my factory needs this year" is a valid requirements contract, because the buyer has committed to buying only from this seller.

Consideration — Something of legal value (a promise, an act, or a forbearance) given in exchange for a promise.

Illusory promise — A statement that sounds like a promise but leaves the promisor free to perform or not, so it provides no consideration.

6.7.5 Settling Claims

Much of business law is about settling disputes rather than litigating them. Three tools depend on consideration:

6.7.6 Promissory Estoppel

Sometimes a person reasonably relies on a promise that lacks consideration, and refusing to enforce it would be unfair. Promissory estoppel (also called detrimental reliance) lets a court enforce a promise without consideration when:

  1. There was a clear and definite promise.
  2. The promisor should have expected the promisee to rely on it.
  3. The promisee actually relied on it, in a substantial and reasonable way.
  4. Injustice can be avoided only by enforcing the promise.

In Hoffman v. Red Owl Stores (1965), a grocery chain repeatedly assured Joseph Hoffman that he would get a franchise if he followed its instructions. Relying on those assurances, Hoffman sold his bakery, bought and then sold a small grocery store, and put a down payment on a lot. The company kept raising the amount of capital it required, and the deal fell apart. There was no final contract, but the Wisconsin Supreme Court allowed Hoffman to recover his losses based on promissory estoppel.7

Promissory estoppel is a safety valve, not a substitute for a written contract. Courts apply it narrowly, and the remedy is often limited to the promisee's actual losses rather than the full value of the promised deal. A business that is relying on a promise should get the promise in a signed contract.

6.8 Agreement in the Digital Age

Most contracts consumers enter today are formed online, usually by clicking. The basic rules of offer and acceptance still apply. The hard question is usually whether the user had enough notice of the terms to be bound by them.

6.8.1 Clickwrap, Browsewrap, and Sign-in Wrap

Courts generally sort online agreements into three types:

The leading case on the other side is Specht v. Netscape Communications Corp. (2002). Netscape invited users to download free software, and its license terms appeared only if a user scrolled below the download button. The court held that users who clicked "Download" without seeing the terms had not agreed to them, because a reasonably prudent user would not have known they existed.10

Clickwrap agreement — An online agreement the user accepts by clicking an "I agree" box or button.

Browsewrap agreement — Online terms that a website says users accept merely by using the site, without any affirmative act of agreement.

6.8.2 E-Signatures and Electronic Records

Two laws make sure that electronic contracts are as valid as paper ones:

An e-signature can be a typed name, a click on an "I accept" button, a signature drawn on a touchscreen, or a cryptographic digital signature. What matters is that the person intended to sign. Some documents, such as wills and certain notices of foreclosure or utility shutoff, are excluded from these laws and may still require paper.

If your business relies on online terms, design the screen for the reader, not the lawyer. Put a clear "I agree" checkbox next to a visible link, keep a record of when each user agreed and which version of the terms was in effect, and ask users to accept again when the terms change materially.

6.9 A Contract Formation Checklist

You'll use this checklist again in the next two chapters. For any fact pattern, work through the questions in order and note the facts that answer each one.

  1. Which law applies? Is this a sale of goods (UCC Article 2) or something else (common law)?
  2. Was there an offer? Did a reasonable person in the offeree's position think the offeror was serious? Were the terms definite enough? Did the offeree know about it?
  3. Was the offer still open? Had it been revoked, rejected, countered, or lapsed? Did anything happen by operation of law? Was it irrevocable as an option, a firm offer, or a matter of reliance?
  4. Was there an acceptance? Was it made by the offeree? Did it match the offer (or, for goods, satisfy UCC §2-207)? Was it communicated by an authorized means, and when did it take effect?
  5. Was there consideration? Did each side give something of legal value in exchange? Watch for preexisting duties, past consideration, and illusory promises.
  6. If there was no consideration, does promissory estoppel apply?
  7. For online agreements: Did the user have reasonable notice of the terms, and did they do something that clearly showed agreement?

If the answer to steps 2 through 5 is yes, there is a contract, at least until the defenses in the next chapter are considered.

6.10 Exercises

1. Offer or invitation? For each of the following, decide whether there is an offer and explain why:

  1. A hardware store's flyer reads, "Cordless drills, $49.99, this weekend only."
  2. A post on a neighborhood app reads, "$200 reward to anyone who finds our lost cat, Biscuit. Call 555-0143."
  3. A text from a supplier reads, "We could probably do around $8 a unit on an order that size."
  4. A furniture store's ad reads, "Saturday 9 a.m.: the first three customers get a new sofa for $1."

2. Does the offer survive? On Monday, Avery emails Jordan an offer to sell a delivery van for $24,000, open until Friday. On Tuesday, Jordan replies, "Would you take $22,000?" On Wednesday, Avery sells the van to someone else, and Jordan hears about it from a mutual friend. On Thursday, Jordan emails, "I accept your offer at $24,000." Is there a contract? Would your answer change if Jordan's Tuesday reply had said, "I'll pay $22,000, take it or leave it"?

3. Is there consideration? Identify whether each promise is supported by consideration, and if not, whether promissory estoppel might apply:

  1. A restaurant owner promises a cook a $1,000 bonus for "all the extra shifts you worked last year."
  2. A landlord promises to reduce a tenant's rent by $100 a month if the tenant signs a two-year renewal.
  3. A city promises a company a tax break if it builds a plant there. The company spends $3 million on the site before the city withdraws the offer.

4. Terms-of-service review. Choose a website or app you use often and create a new account or start checkout, stopping before you pay. Take screenshots of how the terms are presented. Then decide whether the agreement is clickwrap, browsewrap, or sign-in wrap, and use the cases in this chapter to argue whether a court would enforce an arbitration clause in those terms against you. Suggest one design change that would make the terms more likely to be enforced.

5. Discussion. Henry and Priya, two small-business owners, exchange text messages agreeing on the price of 200 custom T-shirts. Priya ends with a thumbs-up emoji. When the shirts arrive, she says she never agreed to the deal. Using the objective theory of contracts and Lucy v. Zehmer, argue both sides.

6.11 Short Case Summaries

6.12 Summary

A contract is a promise the law will enforce. It requires agreement, consideration, capacity, and legality, and whether the parties agreed is judged objectively, by what their words and conduct would mean to a reasonable person. Sales of goods are governed by UCC Article 2. Most other contracts are governed by the common law.

Agreement requires an offer and an acceptance. A valid offer shows serious intent, has reasonably definite terms, and is communicated to the offeree; most advertisements are only invitations to negotiate. An offer ends through revocation, rejection, counteroffer, lapse of time, or operation of law, unless it is an option contract, a merchant's firm offer, or protected by reliance. Acceptance must come from the offeree, must match the offer under the common law's mirror image rule, and generally takes effect when sent by an authorized means.

Consideration is a bargained-for exchange of something of legal value. Promises to perform a preexisting duty, promises made for past acts, and illusory promises lack consideration. Promissory estoppel may enforce a promise without consideration when someone reasonably relied on it. Online, the same rules apply, and courts focus on whether the user had reasonable notice of the terms and clearly agreed to them. E-SIGN and UETA make electronic records and signatures as valid as paper ones.

The next chapter asks what can undo a contract that has all of these elements: a party who lacked capacity, an illegal purpose, a mistake or fraud, or the lack of a required writing.

  1. Restatement (Second) of Contracts § 1 (Am. L. Inst. 1981).↩︎

  2. Lefkowitz v. Great Minneapolis Surplus Store, Inc., 251 Minn. 188, 86 N.W.2d 689 (1957).↩︎

  3. Carlill v. Carbolic Smoke Ball Co., [1893] 1 Q.B. 256 (C.A.).↩︎

  4. Hamer v. Sidway, 124 N.Y. 538, 27 N.E. 256 (1891).↩︎

  5. Alaska Packers' Ass'n v. Domenico, 117 F. 99 (9th Cir. 1902).↩︎

  6. Mills v. Wyman, 20 Mass. (3 Pick.) 207 (1825).↩︎

  7. Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965).↩︎

  8. Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014).↩︎

  9. Meyer v. Uber Technologies, Inc., 868 F.3d 66 (2d Cir. 2017).↩︎

  10. Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002).↩︎