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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

Supp. To CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts Supp. to § 3.5

Supp. to § 3.5 Knowledge of Offer as a Pre-requisite to Acceptance

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(A) The following cases are noteworthy:

(1) Zemke v. City of Chicago, 100 F.3d 511 (7th Cir. 1996) (applying Illinois law). Zemke sought employment as an electrician with the City of Chicago. The City's representative continually told Zemke that he had the job and that all necessary paperwork was complete. But the City never gave Zemke a starting date for that position or, as required by City procedure, a written offer of employment for it. Zemke took another job with City. Three years later Zemke reviewed his personnel file and discovered in it a document entitled ''Notice of Job Offer''-a complete, executed document concerning the electrician position, although never sent to Zemke. The court rejected Zemke's argument that this notice constituted the basis of a binding contract on the grounds that it was an uncommunicated offer and communication was essential to create a power of acceptance.

(2) Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997) (en banc) (applying Washington law), cert. denied, 118 S. Ct. 899 (1998) . In this celebrated class action by temporary freelance workers against the innovative Silicon Valley giant, Microsoft, plaintiffs claimed entitlement to participate in the corporation's extraordinarily valuable stock option plan. Plaintiffs had signed written agreements with the corporation saying they were (a) independent contractors and (b) not entitled to participate in the plan or receive any other benefits.

As a matter of law, however, particularly IRS regulations, both sides agreed that the plaintiffs were ''employees'' and not ''independent contractors.'' The court treats as a mutual mistake the writing's characterization of the plaintiffs as independent contractors and therefore concludes that this characterization had no effect on whether the plaintiffs were entitled to benefits. The rest of the writing's provisions were also irrelevant, according to the court, for the ''not entitled to participate'' provision only spells out the consequences of the (mistaken) label. Accordingly, the writing contained no relevant bargain and the plaintiffs were employees.

As employees, the plaintiffs were among the group to which the corporation had offered employment that included eligibility to participate in the plan. Never mind that when these plaintiffs began work they had no knowledge of the plan's terms. It was enough to create a power of acceptance in them that they knew that the corporation had made an offer to its employees to participate in a stock option plan. This was true, according to the court, even though these plaintiffs were not aware of its terms.

Several dissenting judges found the majority's contract law discussion fundamentally flawed. Factually, the dissenters note that the plaintiff group was told at the outset that they were not eligible for the plan, and the plaintiffs admitted that they did not think they were eligible. Indeed, they signed agreements expressly stating they would not receive any benefits, from the plan or otherwise.

As a matter of contract formation, the dissenters observed that even if the corporation had made an offer of employment to its employees that included the plan, it also thereafter revoked that offer as to these plaintiffs by entering into the specific agreements with them disclaiming eligibility. Doctrinally, the corporation had revoked its offer, said the dissenters, citing § 2.18 of Corbin. The dissenters also found an absence of both consideration (the plaintiffs had furnished none) and mutual assent (neither plaintiffs nor the corporation thought or indicated they were entering into a contract that included plan benefits).

The dissenters were also unpersuaded by the majority's use of mutual mistake to render the writings irrelevant. The parties did not intend merely to lay out the consequences of the ''independent contractor'' label in their written agreements, but had agreed to be bound by the substance of what that label entailed-whether or not the label was correct as a matter of law or for other purposes. The dissenters cite a dispositive Washington case: Daniel v. Pacific Northwest Bell Telephone Co., 580 P.2d 652 (Wash. Ct. App. 1978) held that even though what the parties called an independent contractor was an employee as a matter of law, still the specific treatment they intended by using that term controls rather than the law's abstract treatment.

The dissent certainly has the better of the argument in this case and is correct that the majority's contract analysis is fundamentally flawed. The majority refuses to enforce the contract the parties actually formed and then makes and enforces a contract for them that the parties clearly did not intend to make. Perhaps the wildest part of the majority opinion is the idea that a party has the power to accept an offer whose terms are not known to him.

One more thing. As the dissent points out, these plaintiffs were paid a higher hourly wage than other workers. The bargain reflected that difference but the majority opinion changes the bargain. It had no business doing so.

Supplement to Notes in Main Volume

2. Iowa- Owen v. MBPXLl Corp., 173 F. Supp. 2d 905 (N.D. Iowa 2001) . Though a disclaimer of any legal effect in an employee handbook was upheld in Anderson v. Douglas and Lomason Co., 540 N.W.2d 277 (Iowa 1995) , the court held that statements in the handbook, which the employee had not read, constituted an offer that the employee accepted by continuing as an employee after the handbook was distributed, even though he had never read those handbook sections on which he later relied to claim a unilateral contract that precluded his dismissal without cause. The court explained that this holding was a ''narrow divergence'' from the usual rule that it is impossible to become an offeree without knowledge of the offer, and that performance must be induced by the promise to form a unilateral contract. It justified this divergence on the grounds that employee handbooks distributed to all employees are not individually negotiated agreements but are standardized agreements between the employer and a class of employees, and the use of such standardized agreements is interpreted as treating alike all those who are similarly situated. The instant case relegates Anderson to the narrow situation of the formation of a unilateral contract. Where the offer requires acceptance by promise rather than performance (a ''bilateral'' contract), the traditional rule applies, i.e., a failure to communicate the terms of a proposal (here, arbitration) cannot constitute an effective offer and no contract would result from the continued employment of the plaintiff.