You Didn't Form a Contract, Did You?

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  Imagine the following series of events: you contact a business owner to perform a service for your company.  You two engage in series of communications, each asking the other to specify what exact services to provide and their cost.  Suddenly the provider arrives at your office to begin work, thinking the two of you have agreed on terms.  You tell him you’re not done negotiating while he says he’s ready to go.  He eventually leaves but sues you for breach of contract, leaving you with the possibility of a large legal bill.

     Did you inadvertently form a contract?  The answer lies in whether negotiations led to a “meeting of the minds,” also referred to as a “manifestation of mutual assent.”  Unfortunately, the Second Restatement of Contract’s definition is less than satisfying: “Manifestation of mutual assent to an exchange requires that each party either make a promise or begin to render performance.”  Several early Texas cases contain a better definition: “The assent must comprehend the whole of the proposition; it must be exactly equal to its extent and provisions, and it must not qualify them by any new matter.” 

     A brief primer of contract formation will clarify.  Contract negotiations occur over a strict series of events.  The offeror makes an offer that contains the complete terms of the proposed contract (this makes him the “master of his offer”).  If the offeree accepts the terms, a contract is formed; if the offeree responds with new terms and conditions, he has rejected the first offer and made a counter-offer, which turns the original offeror into an offeree.  The process now repeats itself until one party stops adding news terms and conditions and consents to the proposed terms; this is the exact moment when a “meeting of the minds” or “manifestation of mutual assent occurs.
   
   A very old Texas case illustrates this point.  In the summer of 1854, a west Texas store-owner named S.H. Summers mailed an offer to purchase certain items from Boston wholesaler Whitney, Fenns, Shaw & Co.. Later in the summer, Whitney shipped goods to Summers, indicating they believed they formed a contract for sale.  But Whitney also sent Summers a letter that contained the following key paragraph:

We take much pleasure in handing you invoices for goods ordered, which we have shipped per bark Helen, which we trust will arrive safely and in due season, and give perfect satisfaction. She is to sail very soon. Please notice that we have insured the goods to Houston only, which we trust will be agreeable to your wishes. The gentlemen's gauntlets we were entirely unable to find in our market; also the white kerseys, which are not now made here. We send you a case of Georgia plains, at the agent's price, which, we have no doubt will please you. We were in doubt whether you wanted bleached linen thread or white brown, and have therefore sent you a small quantity of each.  Please return us your notes payable in six months, and if agreeable, at the office of R. &. D. G. Mills, Galveston, with exchange. If you want longer time please add the interest after six months, and make them as short as you can conveniently meet them.       

Whitney doesn’t have several items Summers requested and therefore included substitute goods that may be unacceptable.  The letter also contains specifications for the method of payment, another key contract term, along with place of delivery.   The addition of numerous terms and conditions led the Supreme Court of Texas to rule the parties did not form a contract.     

     This example is bit extreme by modern standards; in the current business environment, a return email or phone call could have cleared up the issue within a few hours or minutes.  But it does provide an excellent example of a situation where the offeree makes a counter-offer instead of accepting the proposed terms and conditions thereby forming a contract.  And it also illustrates a key point of contract negotiations: always know where you are the in the process.  And if you’re unsure, you can always clarify your position by simply saying, “we haven’t formed a contract yet.”