Tuesday, June 30, 2009


When you click the “Place Your Order” button at Amazon.com, tell the cab driver where you want to go, or hand a $20 bill to the cashier at the movies, you are accepting an offer to enter into a contract. All of these actions—despite the lack of fanfare—communicate an unconditional willingness to be bound by the other party’s offer. An acceptance is a necessary part of a legally binding contract: If there’s no acceptance, there’s no deal.

There is no acceptance if … Occasionally, one party disputes whether the other accepted an offer. In general, acceptance has not occurred if:

  • one party’s response to an offer doesn’t communicate a readiness to be bound (“Sounds good, let me think about it”);
  • the response has strings attached (“I’m willing to do it if you’ll pay me ten thousand dollars more”); or
  • the offer is based on lies (“You said you had title to the car.”)

Also, if the person making the offer indicates how the other party must accept it—“Call me with your response before Saturday”—then, the other party must accept under those conditions to create a contract. In this example, accepting on Sunday will not create a contract.

Conditional acceptance and counter offers. When one party responds to an offer with additional conditions or qualifications, the response is generally considered to be a counter offer, not an acceptance. A counter offer isn’t an acceptance because it materially changes the terms of the proposed contract. Legally, a counter offer is considered a rejection of the original offer and the proposal of a new offer in its place.

EXAMPLE: A customer asks a carpenter to build a cabinet for $1,000 and the carpenter replies, “OK, if you also pay for my supplies.” The carpenter has made a counteroffer. The customer must accept the counter offer in order for an agreement to be formed.

However, under the Uniform Commercial Code—legal rules governing the sale of goods—the rules are sometimes more liberal.[i] Under these rules, a qualified acceptance might create a binding contract, despite adding new conditions, unless the modifications cause surprise or hardship. For example, “I accept your offer to sell your car, but you’ll have to arrange to deliver it to California, instead of New York.”

Acceptance by actions. Acceptance isn’t always communicated by words; sometimes actions suffice. For example, if a buyer places an order to buy goods at a certain price, and the seller responds by shipping the goods, the seller’s actions signal acceptance of the offer. However, silence by itself – that is, if one party doesn’t say or do anything—rarely constitutes acceptance. That principle is derived from a 19th century English contract case in which a man offered to buy a horse and stated that unless he heard otherwise from the seller, “I consider the horse mine.”[ii] The British court ruled that his assumption didn’t create a contract; the other party’s acceptance had to be clearly expressed. Acceptance of goods that weren’t ordered may also create a binding contract except when a consumer receives unsolicited merchandise. For example, in California, the receipt of unsolicited merchandise is an unconditional gift, which the recipient need not return or pay for.[iii]

Open offers and options. Parties that want some time to consider an offer—for example, for a home purchase—can enter into an option agreement. In an option agreement, one party pays for the exclusive right to accept an offer during a fixed period. This gives the potential buyer an opportunity to consider the deal without having to worry that someone else will snap it up—or that the terms of the deal will change—in the meantime.

[i] UCC 2-207

[ii] Felthouse v Bindley (1862) EWHC CP J 35

[iii] Cal. Civ. Code Sec. 1584.5

acceleration clause

It’s true of cars, and it’s true of contracts: An accelerator speeds things up. Acceleration clauses (also known as “demand clauses”), commonly found in loans, leases, mortgages, or other payment agreements, require the party who borrowed money to speed up the payments. If you’re required to make monthly payments on a loan and you miss a payment, an acceleration clause makes the entire amount you borrowed due. In other words, you must immediately pay back the entire loan.

Unenforceable clauses. Courts won’t enforce an acceleration clause that is so grossly unfair as to be unscrupulous (or “unconscionable”). This issue is more likely to arise in a lease, because the acceleration clause forces the tenant to pay for something he has not yet received (time spent in the rented space or using the rented equipment), while in other loan agreements, the debtor has already gotten the money, home, car, or other purpose of the loan.

Minimizing the damages. In general, courts don’t like it when acceleration clauses are used as penalties. A court is more likely to enforce a clause that approximates, at least to some degree, the damages cause by the missed payment(s), as estimated when the contract was signed.

EXAMPLE:A company leased ATM machines. When one of its customers missed a payment, the company tried to enforce an acceleration clause that made all future payments immediately due. An Ohio Court of Appeal ruled that the acceleration clause was unenforceable because it did not impose any obligation on the leasing company to minimize (or “mitigate”) its damages. For example, if the leasing company repossessed the ATM machine and then immediately leased it to someone else, the amount it earned from the new rental should have been offset from the amount owed by the first customer. Otherwise, the ATM company is getting paid twice for use of the same machine.
A court will also decline to enforce an acceleration clause if the parties have an honest dispute about the amount owed.

Mortgages. Most mortgages provide a grace period before the acceleration clause kicks in. During the grace (or “cure”) period, the borrower has the chance to make up missed payments. If the borrower is unable to bring the payments current, then the lender can demand full payment and start foreclosure proceedings or work with the borrower to avoid foreclosure. An acceleration clause in a mortgage may be triggered by other events besides a failure to make timely payment—for example, the sale of the property (sometimes referred to as a due-on-sale clause) or refinancing