The Offer
The Offer: A Conditional Promise
All contracts start when an individual or business proposes a deal. It might involve buying or selling goods, performing services, or making an exchange. An offer is a conditional promise to do or refrain from doing in the future (i.e., after the contract is formed). The point of the offer is to demonstrate the offeror's willingness to enter into a contract with the offeree (i.e., assent to the terms).
Required Elements of an Offer
Offers can be formal or informal, but three key elements must exist for an offer to be valid: (1) intent to enter into a binding contract, (2) the offer being communicated, and (3) the terms of the offer being reasonably definite (certain).
📌 Accepting an offer only has legal significance if the offer is valid. Accepting an invalid offer does not create a binding agreement.
Serious Intent
As noted above, the offer must demonstrate the offeror (i.e., the party making the offer) genuinely assents to enter into a mutually binding contract with the offeree (i.e., the party intended to receive the offer). Specifically, the intent requirement is satisfied only if there was serious intent to make an offer to enter into a contract.
If there is a dispute over whether one of the parties seriously intended to make an offer, the courts use the objective reasonable person test: Would a reasonable person, looking at the words and conduct, think that a genuine offer was made? If not, then the offer was invalid. If it objectively appears that the purported offer was a joke, then the offer was invalid. Also, seriousness is commonly—but not always—lacking during casual negotiations and when making promises in a social setting.
📢 The Reasonable Person Test in Contract Law
In contract law, if a party's intent is in question, the courts look for "objective manifestations of intent [conduct, words, context, etc.] ... viewed from the vantage point of a reasonable person in the position of the other party."*
Common factors courts consider (but certainly not exclusively) when evaluating seriousness using the reasonable person test include:
the outward appearance, not hidden or subjective thoughts;
whether the purported offer was made in a commercial/business setting (serious intent is generally presumed, although this may be rebutted);
whether the purported offer was in a social or domestic setting, such as those involving friends or family (serious intent is generally presumed to be lacking, although this may be rebutted);
whether the statements were jokes or obvious exaggerations (including puffery);
whether the setting was purely social in nature (e.g., telling a friend, “I’ll pay you back next week”);
whether the statements were part of early-stage negotiations identified as non-binding or “subject to contract”;
whether the terms were written, clear, and/or definite;
whether the language was formal (“agree,” “shall,” deadlines, remedies); and
whether money was paid, a party relied on the statements, or performance started;
Communication
Since a contract is an agreement in which each party assents to the terms of the other party, the terms must be communicated
Thus, a contract cannot be legally binding unless an offer is in fact communicated to the offeree. If you write an e-mail to a friend with an offer to sell your car for a certain sum and then get distracted and forget to send it, no offer has been made. If your friend coincidentally e-mails you the following day and says that she wants to buy your car and names the same sum, no contract has been made. Their e-mail to you is not an acceptance, since she did not know of your offer; it is, instead, an offer or an invitation to make an offer. Nor would there have been a contract if you had sent your communication and the two e-mails crossed in cyberspace. Both e-mails would be offers, but for a valid contract to be formed, it would still be necessary for one of you to accept the other’s offer. An offer is not effective until it is received by the offeree (and that’s also true of revoking offers and rejecting offers).
The requirement that an offer be communicated does not mean that every term must be communicated. You call up your friend and offer to sell them your car. You tell them the price and start to tell them that you will throw in the snow tires but will not pay for a new inspection, and that you expect to keep the car another three weeks. Impatiently, they cut you off and says, “Never mind about all that; I’ll accept your offer on whatever terms you want.” You and your friend do not have a contract.
These principles apply to unknown offers of reward. An offer of a reward constitutes a unilateral contract that can be made binding only by performing the task for which the reward is offered. Suppose that Bonnie posts on a tree a sign offering a reward for returning her missing dog. If you saw the sign, found the dog, and returned it, you would have fulfilled the essentials of the offer. But if you chanced upon the dog, read the tag around its neck, and returned it without ever having been aware that a reward was offered, then you have not responded to the offer, even if you acted in the hope that the owner would reward you. There is no contractual obligation.
In many states, a different result follows from an offer of a reward by a governmental entity. Commonly, local ordinances provide that a standing reward of, say, $1,000 will be paid to anyone providing information that leads to the arrest and conviction of arsonists. To collect the reward, it is not necessary for a person who does furnish local authorities with such information to know that a reward ordinance exists. In contract terms, the standing reward is viewed as a means of setting a climate in which people will be encouraged to act in certain ways in the expectation that they will earn unknown rewards. It is also possible to view the claim to a reward as noncontractual; the right to receive it is guaranteed, instead, by the local ordinance.
Although a completed act called for by an unknown private offer does not give rise to a contract, partial performance usually does. Suppose Apex Bakery posts a notice offering a one-week bonus to all bakers who work at least six months in the kitchen. Charlene works two months before discovering the notice on the bulletin board. Her original ignorance of the offer will not defeat her claim to the bonus if she continues working, for the offer serves as an inducement to complete the performance called for.
Definiteness (Certainty)
The common law reasonably requires that an offer spell out the essential proposed terms with sufficient definiteness—certainty of terms that enables a court to order enforcement or measure damages in the event of a breach. As it has often been put, “The law does not make contracts for the parties; it merely enforces the duties which they have undertaken” (Simpson, 1965, p. 19). Thus a supposed promise to sell “such coal as the promisor may wish to sell” is not an enforceable term because the seller, the coal company, undertakes no duty to sell anything unless it wishes to do so. Essential terms certainly include price and the work to be done. But not every omission is fatal; for example, as long as a missing term can be fixed by referring to some external standard—such as “no later than the first frost”—the offer is sufficiently definite.
In major business transactions involving extensive negotiations, the parties often sign a preliminary “agreement in principle” before a detailed contract is drafted. These preliminary agreements may be definite enough to create contract liability even though they lack many of the terms found in a typical contract. For example, in a famous 1985 case, a Texas jury concluded that an agreement made “in principle” between the Pennzoil Company and the Getty Oil Company and not entirely finished was binding and that Texaco had unlawfully interfered with their contract. As a result, Texaco was held liable for over $10 billion, which was settled for $3 billion after Texaco went into bankruptcy.
Offers that state alternatives are definitive if each alternative is definite. David offers Sheila the opportunity to buy one of two automobiles at a fixed price, with delivery in two months and the choice of vehicle left to David. Sheila accepts. The contract is valid. If one of the cars is destroyed in the interval before delivery, David is obligated to deliver the other car. Sometimes, however, what appears to be an offer in the alternative may be something else. Charles makes a deal to sell his business to Bernie. As part of the bargain, Charles agrees not to compete with Bernie for the next two years, and if he does, to pay $25,000. Whether this is an alternative contract depends on the circumstances and intentions of the parties. If it is, then Charles is free to compete as long as he pays Bernie $25,000. On the other hand, the intention might have been to prevent Charles from competing in any event; hence a court could order payment of the $25,000 as damages for a breach and still order Charles to refrain from competition until the expiration of the two-year period.
The Termination of an Offer
Once made, offers can be terminated in a number of ways. An offer that has been properly communicated continues to exist until it:
Is rejected;
Is replaced by a counteroffer;
Lapses or expires;
Is revoked; or
Is terminated by operation of law.
Unless the offer states a specific time, it remains open for a reasonable time. A lapsed offer is an offer that is no longer valid because a reasonable time to accept it has expired. An expired coupon is an example of a lapsed offer.
What Is Not an Offer
Before discussing the required elements of a legally effective offer, it is helpful to start with some circumstances that cannot be a legally effective offer:
Illusory Promise
No offer exists because there is no duty to perform
“If I decide to buy a new car, I’ll give you my old one.”
Pre-existing Duty
A party cannot leverage an existing duty to get more out of someone else
“I agree to teach you business law for $100 even though you have already paid tuition for the course.”
Forbearance
An offer cannot be a promise not to pursue a legal claim that is known to be invalid (Note: If the claim is valid, then forbearance may be a valid offer)
“I know the accident was completely my fault, but I promise not to sue you.”
Past Consideration
An offer cannot be based on past actions
I paint your house. Two months later you say that you will pay me $500 for doing it. If you change your mind and decide not to pay me, I cannot enforce your promise because it was in consideration of a past event.
Advertisements
Most advertisements, price quotations, and invitations to bid are not construed as offers. An advertisement on a furniture store's website that a couch is on sale for $800 is normally intended only as an invitation to the public to come to the store to make a purchase. Similarly, a statement that a seller can “quote” a unit price to a prospective purchaser is not, by itself, of sufficient definiteness to constitute an offer; quantity, time of delivery, and other important factors are missing from such a statement.
In order to avoid a misinterpretation that an advertisement about a product's price and quantity is an offer, a seller or buyer may say something akin to "Make me an offer" or "$800 or best offer," as commonly seen on eBay. Such a statement obviously suggests that no offer has yet been made. This principle usually applies to invitations for bids (e.g., from contractors on a building project or auctions), again, as seen on eBay. Many forms used by sales representatives as contracts indicate that by signing, the customer is making an offer to be accepted by the home office and is not accepting an offer made by the sales representative.
Although advertisements, price quotations, and the like are generally not offers, the facts in each case are important. However, under the proper circumstances, an advertised statement can be construed as an offer
Despite the common-law rule that advertisements are normally to be considered invitations rather than offers, legislation and government regulations may offer redress. For many years, retail food stores have been subject to a rule, promulgated by the Federal Trade Commission (FTC), that goods advertised as “specials” must be available and must be sold at the price advertised. It is unlawful for a retail chain not to have an advertised item in each of its stores and in sufficient quantity, unless the advertisement specifically states how much is stocked and which branch stores do not carry it. Many states have enacted consumer protection statutes that parallel the FTC rule.
Invitations to Bid at Auction
Invitations to bid are also not generally construed as offers. At an auction, offering an item for bidding is not an offer, but rather an invitation for potential buyers (bidders) to make offers. A prospective buyer becomes an offeror when making a bid at the auction, typically indicating their interest in purchasing the auctioned item by raising a paddle, making verbal offers, or submitting bids by mail or online, depending on the type of auction.
When a bidder makes a bid, they are essentially making an offer to purchase the auctioned item at the bid price. The agreement is formed when the auctioneer accepts the highest bid by calling “Sold!” or otherwise indicating acceptance. At this point, a legally binding contract is created between the successful bidder (offeror) and the auctioneer (offeree).
Attributions and Licensing
Except where otherwise noted, this page's content is adapted from:
Contracts in Fundamentals of Business Law by Melissa Randall (2020), used under CC BY-NC-SA 4.0.
Objective Theory of Contracts and The Offer in Business Law I - Interactive by Melanie Morris (2024), used under CC BY-NC-SA 4.0
This page is licensed under CC BY-NC-SA 4.0.
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