Houston Dairy, Inc. v. John Hancock Mutual Life Insurance Co.

United States Court of Appeals, Fifth Circuit
643 F.2d 1185 (1981)

ELI5:

Rule of Law:

An untimely acceptance of an offer constitutes a counter-offer, and the original offeror's acceptance of that counter-offer must be communicated to the counter-offeror to form a binding contract; silence or the mere act of depositing a check is insufficient communication without prior dealings suggesting otherwise.

Facts:

On December 30, 1977, John Hancock Mutual Life Insurance Company mailed a commitment letter to Houston Dairy, Inc., offering an $800,000 loan.
The offer stipulated that acceptance must occur within seven days and be accompanied by a $16,000 'Good Faith Deposit.'
On January 17, 1978, eighteen days after the offer was made, the president of Houston Dairy executed the commitment letter and mailed it back with a $16,000 cashier's check.
Upon receiving the late acceptance on January 23, an agent for John Hancock mailed the check to a depository for deposit and forwarded closing information to its attorney.
On January 28, the attorneys for both parties discussed the procedural details and fees for closing the loan.
On January 30, Houston Dairy secured a loan with a more favorable interest rate from a different bank.
Houston Dairy then contacted John Hancock to request a refund of its $16,000 deposit, which John Hancock refused.

Procedural Posture:

Houston Dairy, Inc. filed a diversity action against John Hancock Mutual Life Insurance Company in federal district court in Mississippi to recover a $16,000 deposit.
Following a nonjury trial, the district court held that a binding contract existed and that the deposit constituted valid liquidated damages for Houston Dairy's breach.
The district court entered a judgment in favor of John Hancock.
Houston Dairy, Inc. (appellant) appealed the judgment to the United States Court of Appeals for the Fifth Circuit.

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Issue:

Does an offeree's deposit of a cashier's check, sent with a late acceptance that constitutes a counter-offer, serve as a communicated acceptance of that counter-offer, thereby forming a binding contract?

Opinions:

Majority - Ainsworth, Circuit Judge

No. Depositing a check sent with a late acceptance does not, by itself, constitute a communicated acceptance of the resulting counter-offer. Houston Dairy's response after the seven-day period was not an acceptance but a counter-offer, which shifted the power of acceptance to John Hancock. For a contract to be formed, John Hancock's acceptance of this counter-offer must have been communicated to Houston Dairy. The act of depositing the cashier's check was insufficient as communication because Houston Dairy had no way of knowing it had occurred. Furthermore, silence cannot operate as acceptance in this case, as there were no prior dealings or other circumstances that would lead Houston Dairy to understand that silence and retention of the deposit constituted acceptance, as required by Restatement § 72. The conversation between the attorneys was also not a communication of acceptance, as it only concerned procedural matters, and John Hancock's attorney was not even aware of the counter-offer at the time. Since acceptance was never communicated, no contract was formed, and Houston Dairy was entitled to revoke its counter-offer and recover its deposit.

Analysis:

This decision reaffirms the fundamental contract principle that acceptance must be communicated to the offeror to be effective. It clarifies that when a late acceptance becomes a counter-offer, the original offeror's subsequent actions, like depositing a check, are not presumed to be a communicated acceptance unless the counter-offeror has reason to know of them. The ruling underscores the importance of express communication over ambiguous actions, thereby providing certainty in contract formation. This precedent limits the doctrine of acceptance by silence to narrow circumstances, such as where prior dealings establish a clear understanding between the parties.

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