Here’s an interesting question (at least interesting to me): When does a response to an offer constitute a counteroffer? And if it does constitute a counteroffer, so what? Does that counteroffer make the agreement binding or is it simply a rejection of the original offer? In other words, is the counteroffer simply an offer for an entirely new contract?
This comes up frequently in employment situations, where for example a company might offer a severance package to an employee, and the employee might respond by asking for more money or other different terms. Obviously, if the employee outright rejects the employer’s offer, that’s an easy case where the offer is dead. But often that’s not what happens. Instead, what often happens is that the employer offers a month or so of severance compensation, and the employee responds by asking for health care coverage as well. Or asks for a letter of reference, or a mutual agreement of non-disparagement. Or, for another couple of months of pay.
The employee might think that he or she is simply negotiating with the employer, not rejecting the original offer. But with a few exceptions, the employee would be wrong.
Here’s another example, this one outside the employment context:
Two unrelated individuals are both interested in purchasing a piece of real estate from the current owner. One of the individuals is the first to submit an offer, to which the seller responds with a counteroffer. The potential buyer accepts the counteroffer. However, before this first individual accepts the seller’s counteroffer, the seller accepts a separate offer from the second interested buyer and sells the property to that other buyer.
The first, now-jilted potential buyer sues the seller to try to void the sale of the property to the second interested buyer and instead force the seller to sell to the first buyer under the terms of the counteroffer. That is the case decided by a North Carolina court in Normile v. Miller.
This case was an odd one, if for no other reason than that the real estate broker for the plaintiff (the first buyer) also represented the second, successful buyer of the property. In fact, the broker actually said to his now-former client “you snooze, you lose; the property has been sold.” (Yes, he really did say this.) But the case highlights a distinctive point of contract law for transactions involving anything other than goods governed under the Uniform Commercial Code, namely: Unless an offer expressly states otherwise, an offer must be accepted on the terms of the offer. Without any changes, additions, modifications or deletions. As commentary on the Normile v. Miller case correctly notes,
When a potential purchaser submits an offer to the seller and the seller makes changes to the offer prior to signing, it is generally referred to as “qualified or conditional acceptance.” The type of acceptance is a counteroffer and functions as a rejection of the original offer submitted by the potential purchaser. In the present case, because Defendant changed terms of [Plaintiff’s] offer, Defendant did not accept [Plaintiff’s] offer. In fact, Defendant’s counteroffer actually operated as a rejection of [Plaintiff’s] offer.
The court ruled in favor of the seller, holding that there was no enforceable contract between the first offeror and the defendant-seller for the sale of the property, since the seller never accepted the buyer’s offer and instead made a counteroffer. That counteroffer thus constituted a new offer, which the potential buyer could choose to accept or not. And since there was no exclusivity on the terms of the counteroffer, the seller was free to accept the other offer from the second potential buyer.
It might seem silly that every single proposal of even insignificant changes should constitute a re-start of the offer-and-acceptance contracting negotiation process. But the reality is that this happens every day in business negotiations, with the point that generally until there is a signed deal or some other evidence of mutual intention to be bound, there is no binding contract.
The risk with modifications and conditions added to offers is that the offeror can generally – and justifiably – treat the proposed changes as evidence of a rejection of the offer. The original offeror is certainly free to negotiate with the opposite party – now the counterofferor – to try to come to mutual agreement, but there is no obligation to do so.
Taking someone’s offer, marking it up, signing it and sending it back does not make it a contract. Rather, not only does that markup turn the original offer into a proposal for changed terms, but it constitutes a full, final legal rejection of the original offer. Conditional acceptance also is not “acceptance”, and in fact is a counteroffer and rejection. Nolo offers this good illustration:
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 counteroffer in order for an agreement to be formed.
The UCC Exception
Unlike employment contracts and other contracts for services, the Uniform Commercial Code governs the sale of goods, and has special provisions applicable to just this type of situation but just to contracts for the sales of goods. (Real estate is generally not treated as “goods” for purposes of the UCC.) The UCC is state-law specific and varies slightly from state to state, but general provisions apply in most states.
With some simplification, Section 2-207 under the UCC allows for a party to propose changes to a contract without killing the original offer entirely. As noted above, generally speaking unless an offer expressly states otherwise, an offer must be accepted on the terms of the offer. Without any changes, additions, modifications or deletions. UCC 2-207 allows for the proposal of “terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms”. Similarly, additional terms will not be allowed if the original offer “expressly limits acceptance to the terms of the offer”. Assuming those hurdles are hurdled, the original offer will be deemed accepted and a contract is formed and enforceable and will include the newly proposed terms.
The UCC governing scheme creates its own problems for contract interpretation and enforceability, which are beyond the scope of my short discussion here but which Brian Rogers discusses at length in his blog. Nonetheless, the UCC rules illustrate the limited parameters of offers and counteroffers in just about all contracts for services, including (as illustrated) in contracts for sales of real estate. Sometimes, offerors will specify that an offer “must be accepted as is”, but there is really no requirement for such a disclosure. Again, receiving an offer, marking it up, signing it and sending it back does not thereby make a contract. And, as illustrated in Normile v. Miller (discussed above), that action also releases the offeror from any further obligation to enter into a contract or even consider further discussions.
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