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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 2 OFFERS; CREATION AND DURATION OF POWER OF ACCEPTANCE

1-2 Corbin on Contracts § 2.27

§ 2.27 Deposits to Be Forfeited in Case of Revocation

In an invitation for bids, especially in competitions for public construction contracts, it is sometimes provided that no bid will be considered unless it is accompanied by a deposit of cash or certified check, and that this deposit shall be forfeited if the bidder revokes the bid or refuses to execute a written contract. A bid submitted in response to such an invitation as this is not necessarily an irrevocable offer, whether the deposit accompanies it or not.n1 The offeree has given no consideration, even though it is thought that the bidder has impliedly promised not to withdraw the bid. It is not probable that mere deliberation over the bid, along with the other bids, or a promise to give such deliberation, would be held to be a sufficient consideration for a promise or sufficient action in reliance upon it to make it binding.n2

What becomes of the deposit, in case of a revocation, is quite a different question from that of irrevocability. Even if the revocation is held to be effective, it is also usually held that the offeree may keep the deposit.n3 If the amount of this deposit is in excess of any injury that the offeree may be regarded as suffering because of the withdrawal, there is no doubt that its forfeiture to the offeree operates as a penalty. A provision in a contract for the payment of a penalty for a breach is not now enforceable in the courts, payment of more than full compensation for harm suffered being regarded as more than justice requires. On this ground, there are cases holding that an offeree can retain no more of the deposit than the amount of harm suffered. This should be the holding, even though the bid is a binding option and is therefore irrevocable by contract, if the forfeiture of the deposit is in truth a penalty and not a reasonable liquidation of damages.n4 The mere fact that the word ''forfeit'' is used is not conclusive as to the nature of the requirement. Harm suffered by the revocation of a bid is in some respects uncertain and difficult to estimate. Even though another bidder is found who will do the work for the same amount or less, it is not certain that the performance rendered by another will be equal to that promised by the bidder who revokes.

Of course, if the bid is effectively accepted before it is revoked, an attempted revocation is ineffective and the bidder is bound by contract.n5 In these cases, however, it is seldom that a notice by the offeree that the bid is the lowest, or even that it is accepted, will close the contract. Generally, it is understood that they shall not be bound by contract prior to the execution of a formal written instrument. If the attempted acceptance of the bid by the offeree is defective because it is conditional, or otherwise different from the terms of the bid, no contract has been consummated, the bidder is free to revoke and has a right to the return of the deposit.

An offer to buy or to sell is not made irrevocable by the mere fact that it is accompanied by a deposit or even payment in full, there being no agreement with respect to its forfeiture. In such a case, the offer is revocable as in the ordinary case. Upon a proper revocation the offeror has a right to the return of the deposit.n6

Legal Topics:

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

Public Contracts LawBids & FormationOffer & AcceptanceAcceptances & AwardsPublic Contracts LawBids & FormationCompetency of PartiesContracts LawFormationOffersIrrevocable OffersPublic Contracts LawBids & FormationSealed BidsGeneral Overview

FOOTNOTES:

(n1)Footnote 1. The Restatement (Second) of Contracts § 44 provides: ''An offeror's power of revocation is not limited by the deposit of money or other property to be forfeited in the event of revocation, but the deposit may be forfeited to the extent it is not a penalty.'' Of course, it may be that the bidder makes an irrevocable offer because of a statute or rule of public policy discussed in § 2.26 of this treatise.

(n2)Footnote 2. See Boston & M.R. Co. v. Bartlett, 3 Cush. 224 (Mass.1849) where, ''in consideration that said corporation would take into consideration the expediency of buying said land for their use,'' the defendant promised to sell for $20,000 if the corporation would accept within thirty days. There was an acceptance of this offer before notice of any revocation; so that the court did not need to decide the question of irrevocability. The court said: ''No importance is attached to the consideration set out in the bill, namely ''that the plaintiff would take into consideration the expediency of buying the land.'''' Mere deliberation over the terms of the offer is different from having an engineer investigate the character of the site. The latter, if agreed upon as a consideration would be sufficient. The court rightly held that in the absence of any notice of revocation, the power of acceptance continued for thirty days.

(n3)Footnote 3.

U.S. - Turner v. Fremont, 170 Fed. 259 (8th Cir.1909) .

Md. - City of Baltimore v. J. L. Robinson Constr. Co., 123 Md. 660, 91 A. 682 (1914) .

Mass. - Daddario v. Town of Milford, 296 Mass. 92, 5 N.E.2d 23, 107 A.L.R. 1447 (1936) , regarded as liquidated damages; John J. Bowes Co. v. Milton, 255 Mass. 228, 151 N.E. 116 (1926) ; Wheaton Building & Lumber Co. v. Boston, 204 Mass. 218, 90 N.E. 598 (1910) .

In Wheaton Building & Lumber Co. v. Boston, 204 Mass. 218, 90 N.E. 598 (1910) , the retention of the deposit as liquidated damages was authorized by statute.

In Whitemarsh Township Authority v. Finelli Bros., Inc., 408 Pa. 373, 184 A.2d 512 (1962) , the Authority advertised for sealed bids for sewer construction, with specific instructions that no bid would be considered unless made on a prescribed form signed by the bidding company's president, and accompanied by five per cent of the bid as security. The defendant submitted a bid for $635,018, unsigned, and accompanied by a certified check for $18,000 and a surety bond for $24,000. On February 13, the bids were opened; and the defendant's bid (the lowest one) was seen to be $125,201 less than the next higher bid. On February 20, the Authority's engineer informed it that the difference was so great that ''it was apparent that some error had been made.'' On February 26, the defendant notified the Authority that ''gross errors'' were made and that the bid had been made by an employee without authorization and in the absence of the Company's officers, and requested the return of the check and bond. On February 27, the Authority accepted the defendant's bid; and later forwarded a formal contract and performance bond for execution, declared the $18,000 forfeited, and demanded $13,750 more to make up the full five per cent deposit. This suit was then brought against the bidder and the surety for $125,201 damages. The defendant counter-claimed for the amount of $18,000. The trial court properly gave judgment for the defendant. This judgment was affirmed on the grounds that the bid did not comply with the mandatory instructions, that the Authority could not ''waive'' the requirement, and that there was not ''mutuality of obligation.'' One judge, ''concurs in the result.'' So also does this treatise. Other relevant sections: § 2.9; § 152; § 609; § 610. An earlier case had held that a bid could not be withdrawn for a unilateral negligent mistake in calculation, but damages for the bidder's repudiation were limited by the amount of the bid bond. A.J. Colella, Inc. v. County of Allegheny, 391 Pa. 103, 137 A.2d 265 (1958) .

(n4)Footnote 4. See Chapter 58, Liquidated Damages.

(n5)Footnote 5. In Berkeley Unified School Dist. v. James I. Barnes Const. Co., 112 F.Supp. 396 (N.D.Cal.1953) , the detailed written bid of a building contractor to build for $1,377,700, promising to execute a formal contract on the same terms, was described by the court as an ''irrevocable offer''; but the bid had been accepted by resolution and notice thereof given.

(n6)Footnote 6.

N.Y. -In Evans v. 2168 Broadway Corporation, 281 N.Y. 34, 22 N.E.2d 152 (1939) , the court ordered a sale of a trust corpus. Plaintiff made an offer to purchase accompanied by a payment into court of $20,000 to be paid over to the trustee if the offer were accepted. The court did not authorize acceptance of the offer. It required that additional bids be obtained and if the upset price was not exceeded the trustees were to return to court to seek authorization to accept the plaintiff's offer. Plaintiff revoked. It was held that the revocation was proper and plaintiff was entitled to revocation. In dictum, the court indicated that offer was perhaps irrevocable during the time necessary for judicial scrutiny. If so, it became revocable after the court's decision withholding approval.

See also Restatement of Restitution § 56.

This section is quoted in Rossville Salvage Corp. v. S.E. Graham Co., 319 F.2d 391, 395 (3d Cir.1963) .