Conditional Acceptance Explained
Conditional acceptance of a contract offer occurs when the offeree accepts the terms of an offer but adds conditions to their acceptance. The offeror must agree to the terms in order for a binding contract to exist. This typically involves those who are otherwise willing to enter into a contract but who want certain provisions included in the agreement. Parties can, however, renegotiate the terms of a contract through conditional acceptance.
For example, a buyer may make an offer on a house for the asking price with the condition that the seller make certain repairs. If the seller agrees , a binding contract exists. If the seller does not agree to the conditions, he or she is free to bargain with the buyer as to the terms under which they prefer to perform. Conditional acceptance differs from unconditional acceptance, one in which the offeree agrees to the terms of the contract without adding any modifications. The only way an acceptance is conditional is if the offeree places their acceptance in any way in doubt or expresses their acceptance in a manner that is contrary to the terms of the offer. Acceptance is either conditional or it is unconditional. Conditional acceptance is the same thing as a rejection of the offer and a counteroffer.
Legal Consequences of Conditional Acceptance
The legal ramifications of conditional acceptance are noteworthy as some courts view such acceptance as a rejection and counter-offer, effectively nullifying the parties’ mutual assent to the original agreement, while other courts take the position that a conditional acceptance is not a formal counter-offer that displaces the prior agreement. The Uniform Commercial Code (UCC) moves us toward the latter group of decisions and provides that an acceptance that is conditioned on the offeror’s assent to a different or additional term has the effect of creating a counter-offer and operates as a rejection of the original offer. (Tex. Bus. & Com. Code § 2.206, UCC § 2-206 (2004)). Yet, the UCC’s Official Comments for this section clarify that "a response to an offer which adds terms does not constitute a counter-offer unless the response cannot be construed as an acceptance on the original terms." ("Uniform Commercial Code [2004] § 2-206: . . . There have been cases which hold that a response to an offer which adds terms does not constitute a counter-offer unless the response cannot be construed as an acceptance on the original terms."). The Official Comments further note that "a response which purports to accept an offer subject to the inclusion of additional terms at variance with those offered will constitute an acceptance unless it is clear that a contract on the terms proposed by the offeree would not satisfy the offeror."
As it relates to insurance agreements, however, the American Law Institute has determined that a conditional acceptance often is breached. See Restatement of the Law (Second), Contracts § 59, Comment a. But such an understanding may be somewhat misguided in the context of standard-form contracts. The Restatement also provides, "An offeree who is induced to cause a performance by another is likely to believe that he is bound when, in fact, he is free from liability. The resulting uncertainty in the rights and duties of the parties is at variance with good faith." Id. MOREOVER, SECTION 59 OF THE RESTATEMENT SIMPLY CONSTRUES SECTION 69 REGARDING ACCEPTANCE BY SILENCE, PROVIDING, "if an offeree by words or conduct invites an offeror to together with an acceptance, according to the provisions of Section 69, his conduct does not constitute an acceptance unless consideration has been given for it or it is clear that the remaining performance can be completely rendered without acceptance of the proposal." Id.
Conditions and Counteroffers
A conditional acceptance is an acceptance of an offer where the offeror’s responsibility to perform is contingent on the other party agreeing to another or modified term or terms. On the other hand, a counteroffer is a response to an offer that contains terms that are materially different than the original offer. A rejection and counteroffer terminates the offer and creates a new one. A conditional acceptance doesn’t terminate the offer if a valid acceptance occurs despite the conditional acceptance. For example, "I will sell you my car for $2,000 if you will buy my boat for $12,000." This is an example of a conditional acceptance. A counteroffer would be an offer for "I will sell you my car for $2,000 if you will buy my boat for $10,000." A conditional acceptance leaves an option to the offeree not to enter into a bargain upon acceptance of the condition while a counteroffer is an offer to make a new bargain. Once a counteroffer is made, an offeree may not accept the original offer unless the offeror renews its original offer. For example, "I will sell you my car for $2,000; however, I would rather sell my car for $2,500." The offeree cannot then accept the original offer of a car for $2,000, unless the offeror re-instates his original offer. Sometimes, an acceptance is not an acceptance but instead a conditional acceptance; this is seen when there is an element of surprise in the acceptance, or a conditional element is included in the acceptance. The doctrine of "mirror image" is relevant here. It requires that there be mutual assent which means that the bargain offered must be exactly the same as what was offered. All terms must be exactly the same. For example, in today’s market, an offeree is asked if he is willing to pay asking price, if so, agents proceed under the assumption that an offer is forthcoming. A conditional acceptance for discussion purposes only is not an acceptance. For an example of this, "yes I can get our full asking price if you can close quickly." There is a difference between a conditional statement and a conditional acceptance. A conditional statement that has a legally relevant condition is created if the offeree indicates a wish to enter into a bargain but implies rather than states a condition on which he will enter into it. Whereas a conditional acceptance indicates that the offeree will take the offer if the offeror agrees to certain terms.
Conditional Acceptance Scenarios
Example 2: Acceptance in a Letter of Intent or More Formal Non-Binding Agreement
Conditional acceptance may also arise in the context of a letter of intent, which is frequently a non-binding agreement between parties regarding proposed terms to be embodied in a contract. Conditional acceptance in a letter of intent is not illegal. Such letters are regularly utilized by businesses in the course of contract negotiations, seeking to memorialize the primary deal points in order to expedite the drafting process of a definitive agreement. Even so, rather than embedding the condition in the terms of the agreement, the parties may agree that the acceptance is conditional based on an agreement upon the terms of a binding contract to be negotiated in further detail and executed by the parties.
For instance, in International Minerals v. Huth, 618 F.2d 381,392 (5th Cir. 1980), the parties entered into a letter of intent which stated that the "terms of this letter are intended as a summary of the major provisions of the entire agreement reached between the parties, and the more formal, detailed draft will be reviewed . . . ." The court found that the agreement was a pre-contractual document intended to supplement an actual, binding contract. Id. at 397. It is noted that the letter of intent was appropriately subject to the statute of frauds, notwithstanding its intention to create binding obligations. Id.
In addition, contractual elements such as consideration and the parties’ intent to be legally bound remain necessary for a binding contract to exist. See Gieseke ex rel. Diversified Holdings, Inc. v. IDCA, Inc., 244 Neb. 322, 507 N.W.2d 339, 347 (Neb. 1993) (holding that parties’ understanding that the agreement was to become binding upon execution of later agreement did not prevent the formation of a contract when other elements were satisfied and parties acted as if contract had been formed). Nonetheless, in Wu Acupuncture Clinic, P.C. v. League City, 916 S.W.2d 171, 180 (Tex. App. 1996), the court upheld a letter of intent in recognizing an enforceable contract when the letter of intent sufficiently identified the parties, described the property to be conveyed, indicated the price, and provided for a method to determine the closing date, amount of deposit, and penalties for late performance. The agreement was fully enforceable, notwithstanding that it provided that the parties would enter into a formal contract to memorialize their agreement, and that it contained a subject-to-satisfaction-of-condition clause. Other courts have also enforced letters of intent as binding contracts where the parties expressed the intention for them to be binding agreements. See, e.g., Fregeau v. Michigan Mut. Ins. Co., 90 Mich. App. 789, 282 N.W.2d 801, 805 (Mich. Ct. App. 1979); Edwards v. Hercules, Inc., 754 So. 2d 235, 237 (Fla. Dist. Ct. App. 2000).
How to Approach Conditional Acceptance in Contracts
When faced with an acceptance that is conditional and seems to be outside the zone of acceptable negotiations, there are a number of options for the party to manage the situation. In the first instance, the acceptance can be reviewed to determine if it is truly conditional or whether it is in fact a counter-offer. While this may seem a little basic, the distinction is extremely important. A counter-offer operates as a rejection of the original offer and gives rise to a new offer to which there will need to be an acceptance in order to conclude a binding contract. An acceptance that appears to be conditional but is not a counter-offer is sometimes referred to as a qualified acceptance and the qualification does not operate to reject the original offer as it is still accepted without additional terms or conditions being imposed.
If the proposed acceptance is actually a counter-offer, the party receiving the counter-offer has several strategic options. If there are significant issues with the counter-offer, it can be rejected and a response letter sent to the person making the offer stating they wish to withdraw their previous offer. It is important to ensure the wording of the letter is very clear so as to avoid any suggestion of a continued offer or deemed acceptance. A better outcome may be obtained through further negotiation via email, letter or conversation with a view to reaching a point of common ground that will satisfy both parties and lead to a binding contract .
If the counter-offer is relatively minor, the other party may prefer to simply accept the counter-offer or the conditioning of the acceptance and proceed to perform the contract perhaps reserving rights to retrospectively resolve any issues with regard to the amendments to the contract. This is an approach often adopted in relation to contracts of sale of property where the purchaser signs a contract with the purchase price inserted and Settlement Plan identified and pays the deposit and then moves to settle on the contract, at or before the settlement date, despite the contract being subject to a range of issues including issues regarding clauses (e.g. existing tenant occupier or a caveat). The contract for the sale of property is often subject to a number of representations or warranties which are not confirmed until a later date (e.g. Statements/Certificates of an Accountant confirming the financial position). Sometimes the seller may only have disclosed a limited amount of information up front – especially if the buyer has insisted upon a very short period for due diligence. The buyer can always reserve contractual rights to claim against the seller and/or its security bond if it is revealed that the seller misled or deceived the buyer in relation to any information provided as part of the contract negotiation.
Conditional Acceptance Case Law
In subsequent cases it has been reaffirmed that an acceptance can be made conditional upon the acceptance of other transactions or the fulfilment of other conditions, or both. Whether or not an acceptance is subject to making another agreement is a matter of construction of the correspondence between the parties and the intention of the parties at the time of acceptance has been sought. The comments in the 19th century cases such as Hyde v Wrench (1840) 49 ER 132, Felthouse v Bindley (1862) 142 ER 1043 and Hyde v Baldwin (1867) LR 2 CP 349 are still valid to date and remain good law. In the case of Hyde v Wrench (supra) it was held that a counter-offer destroys the effect of the offer to which it is a counter-offer. In the case of Felthouse v Bindley (supra), it was held that an offer to sell land subject to the approval of the nephew of the offeror was merely an invitation to treat as there was no acceptance of the offer by the offeror’s nephew. In the case of Hyde v Baldwin (supra), the defendant wrote to the claimant offering to sell certain goods which were the subject matter of two contracts concluded between the plaintiff and the defendant. The letter contained a statement that the offer was accepted as soon as the two other contracts had been completed. The plaintiff accepted the defendant’s offer despite having received neither contracts. The defendant refused to fulfil the contract on the ground that it was no longer on terms with the plaintiff and that the offer had lapsed. In affirming the decision of the Court of Appeal, Lord Justice Blackburn said: ‘An offer must be accepted by a person to whom it is made. Therefore, unless the offer in terms says that it is accepted , and that notice will not be required, or unless the offer in terms says that nothing shall be required, I think, in order to conclude the contract, there must be evidence to show that the offer is accepted. Now, if a person makes an offer which is to be accepted on certain terms, the question is, when it is accepted, whether the agreement upon those terms is mutual.’ An offer becomes a contract when it is accepted. Notice of acceptance of an offer is required unless the terms of the offer have either dispensed with the necessity of communication or the law has dispensed with it. It is immaterial to whom the letter containing the acceptance is addressed. What is material is that the acceptance is in writing and sent for the purpose of communicating acceptance of the offer to the offeror and is therefore within the general rule laid down by Parke B in Adams v Lindsell [1818] for the communication of an acceptance. In the case of Entores Limited v Miles Far East Corporation [1955] 2 QB 327 (CA), it was emphasised that it is essential that the acceptance is communicated to the offeror and that this cannot be done indirectly through a third person or an agent. A contract is made by the communication of acceptance in a reasonable manner, whether actual or constructive.
Pitfalls of Conditional Acceptance
To avoid confusion or disputes later on, parties should make clear that their acceptance is conditional and that acceptance will not occur unless the other party accepts the conditions in the acceptance. In order to avoid having an enforceable contract created by a conditional acceptance, the conditional acceptor should clearly indicate that it is not accepting the offer and is instead making a counter-offer. The conditional accepor’s response to the offeror should indicate that the conditions set forth in the response will form the basis for a new agreement if the offeror accepts those terms. Without a clear indication of a counter-offer , the response may be construed as an unconditional acceptance. An unconditional acceptance may accidentally create a binding contract under Contract Law.
Parties can avoid this pitfall of conditional acceptance by explicitly stating that their acceptance of the contract is conditional and contingent upon acceptance of the new offer or terms by the original offeror. Keeping in mind that a counter-offer will typically void the original offer, parties should also aim to keep the proposed terms limited to the original offer. If the terms of the counter-offer are related, but extraneous to the original offer, an acceptance of the counter-offer may be construed as an acceptance of the original offer as well. Depending on the circumstances at hand, it may be wise to reject the first offer and present a new offer in an effort to promote a counter-offer response from the other party.