Offerors Have no Pure Incentives for Making Unilateral Offers

-- By AlisonMoe - 25 Feb 2010

Offerors Have no Pure Incentives for Making Unilateral Offers

Contract theorists assure us that the offeror is the master of his offer. This cannot be true, because offerors have no pure incentives for making unilateral offers. From the offeror’s perspective, exchanging a promise for a promise is always more valuable than exchanging a promise for performance. The only reason why an offeror would prefer a unilateral offer is because such an offer is beneficial to the offeree, and thus more likely to be accepted than a bilateral offer.

To illustrate the point, imagine the following scenario. On Monday, A decides that she wants B to mow her lawn on Friday. A can frame her offer in one of two ways:

1. I promise that if you mow my lawn on Friday, I will pay you $50.
2. If you promise to mow my lawn on Friday, I promise to pay you $50.

The Offeror’s Position in Making a Bilateral Offer

When A extends a bilateral offer, she knows that one of two things will happen. The offer may not be accepted, in which case A knows on Monday that she will not receive the desired performance. In the alternative, B might accept the offer, in which case promises to perform are exchanged. Regardless of whether performance actually occurs on Friday, a bilateral contract assures A the benefit of her bargain on Monday: because she has received a promise, she is guaranteed either performance or damages for breach (imagine the going rate for lawn mowing is $100, so that expectation damages are meaningful). In this way, a bilateral contract offers security for the offeror.

The Offeror’s Position in Making a Unilateral Offer

If A extends a unilateral offer instead, the contract will not be formed unless B completes performance. Up until the moment when B cuts the last blade of grass on Friday, neither party is bound. From Monday until Friday, A does not know whether performance will occur, and has no security if B decides not to mow the lawn.

Why, then, would anyone make a unilateral offer? Perhaps, for the layman, performance seems more valuable than the promise to perform. One can imagine an offeree saying, “I don’t want your promise, just mow my lawn.” Furthermore, there are certainly contracts where damages are not attractive to the offeror, who really desires performance. However, when contrasted with a bilateral contract, a unilateral contract is really no better at securing performance. On the contrary, the only difference between the offers is the security for the offeror and the risk to the offeree. Unilateral contracts are characterized as “promise for performance,” and bilateral contracts are characterized as “promise for promise,” but this is a misleading description of the bargain. In both formulations of the offer, $50 is exchanged for lawn-mowing. The only real difference between the two is the moment when the parties are contractually bound. All contracts are risk allocation devices; a unilateral contract is merely another way for parties to allocate risks. Unilateral contracts allocate the risk of non-performance to the offeror, whereas bilateral contracts allocate the risk of non-performance to the offeree.

Which are just two positions on the full spectrum of loss allocation, all of which can be reached between two parties, or through multi-party arrangements involving bonding or surety. Except in accounts unduly focused on simple, "discrete" transactions, that hardly model the range of what contracts really do in the actual world, this is merely one crude means of allocating non-performance risks in a blunt and insensitive fashion.

But having shown that the distinction between unilateral and bilateral contracts is actually nonsense, you go on using the terms and writing about the subject, which gives the odd literary impression of a writer unconscious of the effect of her argument.

The Offeree’s Position in Receiving a Bilateral Offer

Presented with a bilateral offer, an offeree must assess his exposure to risk. If B accepts the offer, he will have to either mow the lawn or be liable for breach. On Monday, B must calculate the probability that he will perform on Friday. B, not desiring to be bound, may reject the offer not because of the substance of the bargain, but rather because of the exposure to risk. Although the risk in this case seems small, take, for example, the performance at issue in Hamer v. Sidway. The nephew would certainly not have accepted the promise for money in exchange for a promise to forbear drinking for many years. There is simply too much risk that he will breach, and thus the offer is unattractive because the nephew does not want to choose up-front to be bound.

No, in your account it's because the uncle is choosing not to be bound by more than his unsecured word. The nephew might choose up front to be "bound" (whatever that word means, which I suspect of being transcendental nonsense and you do not explain), if shown a trust indenture or some other form of third-party surety for the reliability of the promise he receives. You seem to have forgotten, as I mentioned above, your statement above that this is about risk allocation. Tritely saying that "an offeree must assess his exposure to risk" means little: all parties "must" actively manage all their risks all the time.

The Offeree’s Position in Receiving a Unilateral Offer

If B receives a unilateral offer from A, he is in a low-risk position. On Monday, B does not have to worry about what will happen on Friday. If he performs, he will receive $50. However, if he doesn’t perform, he will owe A nothing. Similarly, in Hamer v. Sidway, the nephew can forbear for as many years as he wants to, but may stop performing (or never perform) if he wants to, without liability. In this way, the offeree finds the unilateral offer attractive, as it offers the potential benefit of the bargain without any risk.

It appears that one might make a unilateral offer in situations where an offeree is unlikely to want to be bound, as illustrated by Hamer v. Sidway. In this way, a unilateral offer is a clever way to induce performance from a reluctant performer.

Or, to put it another way, which will not take 1,000 words, if a guy doesn't want to work for you, don't try to rush him into a deal.

Conclusion

Because a bilateral contract offers more security to the offeror, she has no purely self-interested reason for preferring a unilateral offer to a bilateral offer. Of course, choosing the method of offer most likely to induce performance is still behavior motivated by rational self-interest. It is still the case, however, that there is nothing about a unilateral offer that is intrinsically beneficial to the offeror, and thus the offeror who chooses the type of offer best suited to the offeree cannot be characterized as a “master of his offer.”

But that's a silly conclusion, because it uses supposedly serious formal analysis to contest nothing more than a metaphor. If this exercise was worth doing at all, it was for something more than to quibble with an aphorism. You need to show the reader there was something more at stake.

Fortunately, I think the step likeliest to lead to a significant revision of this essay is the reading I happen to have just assigned, which bears on the basic question this essay tends to slide by: how are bargains really struck? The analysis presented here is charmingly simple, but it does not seem to me to generalize very well outside the Petrie dish in which it was grown. Leff is worried about problems that are central to your project, and I think he has something very useful to contribute.