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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts § 3.41

§ 3.41 Effect of Rejection of an Offer

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The power of acceptance created by an ordinary offer is terminated by a communicated rejection.n1 This is true even though a definite time was given by the offeror for considering the offer and the rejection is before that time has expired. An offeror who receives a notice of rejection, is very likely to change position in reliance thereon. One aspect of this is that, in those cases in which the offer is revocable, the offeror will not think it necessary to send a notice of revocation. This has led to the rule that a definite rejection terminates the offeree's power to accept.

This effect should not be given to a rejection if it is contrary to the offeror's own expressed intention and desire. In making an offer, the offeror has control of its terms and the time and mode of acceptance. The offeror can create such a power of acceptance as whim dictates. The rule that a rejection terminates the power is solely for the protection of the offeror. There seems to be no sufficient reason for terminating the power of acceptance against the offeror's expressed will. Suppose that an offer is made thus: this offer will be left open for acceptance for 30 days, without regard to any rejection, conditional acceptance, or counter-offer. After a rejection by the offeree, the power to accept during the unexpired portion of the 30 days will continue to exist.n2 The offeror's own statement would tend to make the offeree less ready to give due deliberation before putting up rejections and counter-offers as trial balloons.

A rejection is the offeree's manifestation of intention not to accept the offer.n3 There is no rejection if the offeree merely writes: ''Is this the best offer that you will make?'' or, ''Please wire whether you would allow an additional month's credit'';n4 or, ''I am holding your offer under advisement to see whether war will break out.''n5 A statement that ''at present I must reject your offer, but will continue to consider it'' should not be held to be a rejection.n6

At an auction sale it is not a rejection of a bid for the auctioneer to delay the fall of the hammer and to ask for higher bids. If a higher bid is actually made, however, the first bidder would be reasonable in supposing that the bid is no longer operative, whether on a theory of rejection or for other reasons.

When bids are solicited and are sent in for simultaneous opening, or for consideration all together, a bidder should usually be held reasonable in supposing that a bid is rejected as soon as one of the competing bids is accepted. But a mere notice of acceptance may not have any operation in this latter case, for the reason that a formal written contract is contemplated. It has been held that each bid remains open for acceptance for a reasonable time so long as no contract with a competing bidder has actually been consummated.n7

In order to terminate the power of acceptance, a rejection must be communicated to the offeror. It is not operative on mailing, or on starting a messenger, or on saying to a secretary: ''draw a letter of rejection at once, sign it in my name, and mail it.'' The rule as to the effect of a rejection is for the protection of the offeror; and it should go no further than is necessary to attain this purpose. If a rejection is mailed and thereafter the offeree sends a telegram: ''I accept your offer; disregard letter of rejection mailed this morning,'' the acceptance should be held to be effective and the rejection ineffective in case the telegram is received before the letter is received.n8

On the other hand, if after mailing a rejection the offeree has a change of mind and mails a letter of acceptance, there should be held to be no contract in case the letter of rejection is received first.n9 This is so, in spite of the rule that an acceptance by post is effective on mailing, and even though the acceptance is mailed before the rejection is received by the offeror. The offeree, in such a case, has reason to know that the rejection is likely to be received first and to cause the offeror to change both mind and position.n10

There has been little authority on the question whether a rejectionn11 by the holder of a binding and irrevocable option operates as a termination of the power. It is believed, however, that it should have no such effect. The holder of such an option has a right as well as a power, created by contract and not by a mere offer. The holder of a contract right does not terminate it and discharge the duty of the other party by merely saying that it is discharged or by expressing an intention not to enforce. However, such a statement followed by a material change of position by the other party will operate as a discharge by estoppel. Similarly, a notice of rejection by an option holder, followed by a material change of position, should terminate both the contract right and power of acceptance.n12 Even if the notice of rejection were also the repudiation of a contract duty, which it is not, it would be subject to retraction prior to a change of position induced by it and prior to expiration of the time limit for performance. Similarly, a notice of rejection should be revocable.

The effect of a rejection on an option is considered in greater detail in § 3.38 above.

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawFormationOffersGeneral OverviewContracts LawFormationAcceptanceGeneral OverviewContracts LawFormationOffersRejectionsContracts LawFormationAcceptanceReasonable Time

FOOTNOTES:

(n1)Footnote 1.

U.S. - Glacier Park Foundation v. Watt, 663 F.2d 882 (9th Cir.1981) .

Ark. - McClure Ins. Agency v. Hudson, 238 Ark. 5, 377 S.W.2d 814 (1964) . ''Option'' had no consideration and had the effect of an ordinary offer. Moreover, the purported acceptance was not from the offeree.

Hawaii - Burgoyne v. Frank B. Hall & Co., Inc., 781 F.2d 1418 (9th Cir.1986) . Union, a surety company, filed a supersedeas bond to stay execution of a judgment while the case was on appeal to the Hawaii Supreme Court. Burgoyne objected to the bond, asserting that it did not conform to law. The court agreed and the bond was not approved. Nonetheless Burgoyne made no effort to execute on the judgment. After the appeal was decided Burgoyne sought to enforce the bond. The court held that the surety's tender of the bond was an offer which Burgoyne had rejected and which could not now be accepted.

Tex. - Legal Security Life Ins. Co. v. Ward, 373 S.W.2d 693 (Tex.Civ.App.1963) . The insurer sent a policy on terms other than those that were made in the application. The applicant rejected the policy and demanded a refund of premium paid. The insurer complied. The applicant then demanded the policy as sent, in essence attempting to accept the counter-offer after having rejected it. No insurance was effected.

Wyo. - Trautwein v. Leavey, 472 P.2d 776 (Wyo.1970) . This involved a counter-offer which the court treated as a rejection. Additional counter-offer cases to the same effect are discussed in § 3.36 above.

Restatement (Second) of Contracts § 38 provides: (1) An offeree's power of acceptance is terminated by his rejection of the offer, unless the offeror has manifested a contrary intention. (2) A manifestation of intention not to accept an offer is a rejection unless the offeree manifests an intention to take it under further advisement.

But see, Pepsi-Cola Bottling Co. v. N.L.R.B., 659 F.2d 87 (8th Cir.1981) , where a contrary rule was applied in the case of collective bargaining.

The United Nations Convention on the International Sale of Goods provides in Article 17: ''An offer, even if it is irrevocable, is terminated when a rejection reaches the offeror.''

(n2)Footnote 2. The American Law Institute supports this rule. Restatement (Second) of Contracts § 37 provides: ''the power of acceptance under an option contract is not terminated by rejection or counter-offer, by revocation, or by death or incapacity of the offeror, unless the requirements are met for the discharge of a contractual duty.''

Where an option to buy, contained in a lease, expressly provides that it shall be operative against transferees from the lessor, the lessee's power to accept is not terminated by the fact that the lessee refused an offer by the lessor to sell to him before selling the property to a third party. Adams v. Willis, 225 S.C. 518, 83 S.E.2d 171 (1954) .

The power of an offeree to accept an offer is not terminated by a rejection if the offer expressly states that it will be irrevocable for a stated period and the offeror's agent continues to urge acceptance. See Tennent v. Leary, 82 Ariz. 67, 308 P.2d 693 (1957) . Noted also herein under §§ 3.36 and 526.

In Nabob Oil Co. v. Bay State Oil & Gas Co., 208 Okl. 296, 255 P.2d 513 (1953) , an offeree's letter was held to involve a rejection terminating the power to accept.

(n3)Footnote 3. Glacier Park Foundation v. Watt, 663 F.2d 882, 886 (9th Cir.1981) . ''[A] rejection of an offer should be effective when dissatisfaction with its material terms is communicated to the offeror.''

In Chaplin v. Consolidated Edison Co., 537 F.Supp. 1224 (S.D.N.Y.1982) , an offer of settlement was made to claimants who had brought a class action. Their attorney replied, ''After careful consideration [my clients] presented objections which have substantial merit.'' This was a rejection and a change of heart by the offerees was unavailing.

Florida has a statutory form of rejection by which insureds may reject uninsured motorist coverage. Failure to utilize this form does not preclude a showing that the insured knowingly rejected such coverage. Muhammed v. Allstate Ins. Co., 582 So.2d 768 (1991) .

(n4)Footnote 4.

Eng. -Stevenson, Jacques & Co. v. McLean, 5 Q.B.D. 346 (1880).

See, also, First Nat. Exchange Bank v. Roanoke Oil Co., 169 Va. 99, 192 S.E. 764 (1938) .

(n5)Footnote 5.

N.Y. - Mactier's Admr's v. Frith, 6 Wend. 103 (N.Y.1830) .

(n6)Footnote 6. Collins v. Thompson, 679 F.2d 168 (9th Cir.1982) , a counter-offer treated as a rejection. See § 3.39 above.

(n7)Footnote 7.

Mass. - Wheaton Bldg. & Lumber Co. v. Boston, 204 Mass. 218, 90 N.E. 598 (1910) .

A bid is not accepted by merely saying: You are the lucky man; your bid is the lowest. See Leskie v. Haseltine, 155 Pa. 98, 25 A. 886 (1893) .

(n8)Footnote 8. Restatement (Second) of Contracts § 40.

(n9)Footnote 9. This is supported by the American Law Institute, Restatement (Second) of Contracts § 40, which reads: ''Rejection or counter-offer by mail or telegram does not terminate the power of acceptance until received by the offeror, but limits the power so that a letter or telegram of acceptance started after the sending of an otherwise effective rejection or counter-offer is only a counter-offer unless the acceptance is received by the offeror before he receives the rejection or counter-offer.

There seems to be no decided case that supports the quoted section; but the question was put in Howard Smith & Co. v. Varawa, 5 C.L.R. 68 (Australia 1907) . An offer was made by cable, on the part of the plaintiff; and after various intervening cable messages, the defendant cabled a conditional acceptance and counter-offer at 3:40 P.M. Twenty minutes later, at 4:00 P.M. the defendant cabled an unconditional acceptance. As to the effect of these messages the court said:

''The telegram of 3:40 appears to have arrived at Manila at 5:30 P.M. There was no evidence to show when that of 4:00 P.M. arrived there. An interesting argument was addressed to us to the effect that the telegram of 3:40 operated from the time of its despatch, and had the effect of a refusal which could not be followed by an acceptance of the original offer, even if an acceptance of that offer were in fact received before it, and a fortiori if the acceptance were received after the refusal.''

The court found it unnecessary to pass upon the point.

In E. Frederics, Inc. v. Felton Beauty Supply Co., 58 Ga.App. 320, 198 S.E. 324 (1938) , the offeree mailed an acceptance and then wrote a letter indicating that it had not accepted. The court held that if the mailed acceptance was never received and the offeror then changed position in reliance on the second letter, the offeree would be estopped from enforcing the contract. The acceptance, though operative when mailed, would cease to bind the offeror after such a change in position.

(n10)Footnote 10. Restatement (Second) of Contracts § 40, quoted above.

(n11)Footnote 11. The effect of counter-offers on the power of acceptance of options is consider in § 3.38 above.

(n12)Footnote 12. In Ryder v. Wescoat, 535 S.W.2d 269 (Mo.App.1976) , eleven days before an option to purchase real property was due to expire, the option holder said he would not exercise the option. The owner then made preliminary arrangements for others to do work on the land. The court said that rejection would not terminate the power of acceptance and that the preliminary arrangements did not create such a change of position as to justify the imposition of an estoppel.